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Monday, February 9, 2009

Alan Welner Tight Spot August 7, 1974Philippe Petit, a French high wire artist, walks across a tightrope suspended between the World Trade Center's Twin Towers

Ilargi: On Saturday, I posted an article that stated 100.000 Australian small businesses are at high risk of going down under [sic] this year. There was a piece from Britain the same day -which I did not post then- that said 38.000 UK companies are expected to fail in 2009. Yesterday, here at the Automatic Earth, Dan W. wrote about unemployment numbers. Today, the LA Times reports that job losses at small US companies could reach 2 million by 2010. There is something odd and interesting going on here, so I started thinking some more about it. Now I know there are silghtly different definitions and timeframes and calculating methods invoolved here, but I think the meassge will still shine through. Juggling numbers can be both fun and revealing at times.

A little background information: Wikipedia says the respective estimated populations of the US, the UK and Australia are 305 million, 60 million and 21 million. First, here are the three articles:

More than 100,000 small- and medium-sized enterprises could hit the wall this year as banks tighten their lending requirements and big business customers delay paying invoices. According to research from Dun & Bradstreet, the country's leading credit report company, one in nine companies have fallen into the "high risk" category of financial distress, with small businesses facing the biggest likelihood of failure.

..... Small- and medium-sized businesses are the lifeblood of the economy and the traditional generators of jobs. They contribute more than 30 percent to GDP and employ half the country's workers, or 5.5 million people.

..... There are 1600 listed companies in Australia and 1.6 million registered companies. D&B's corporate risk analysis was conducted on a sample of 371,053 companies. Of this sample, 31,000 were categorised as "high risk", and of those, less than 100 of the companies were listed.

The Insolvency Service [..] showed that the total number of company insolvencies reached 21,082, meaning one in every 150 companies went bust in 2008.

..... recovery and restructuring specialist Begbies Traynor predicted that this could be just the tip of the iceberg. It said the number of business failures to come this year is set to surpass the peak of the early 1990s recession, and could reach 38,000 businesses.

....... New research from business insurance comparator simplybusiness.co.uk predicted nearly a quarter of a million of Britain's smallest businesses are at risk of failure, placing over 475,000 jobs in jeopardy.

Small-business job losses could double to 2 million by January 2010 as firms with as many as 49 workers continue an employment decline that started a year ago

..... small-business employment racked up its 12th straight monthly decline, dropping 175,000 jobs, or 0.4%, from December to 49.9 million,

..... Since February 2008, when the total small-business job count was 50.9 million, small firms have cut 1 million, or about 2%, of their jobs.

..... The longest recent decline in small-business jobs lasted 10 months, from August 2001 to May 2002, when 381,000 jobs, or 0.8% of August's 46.7 million jobs, were lost. The jobs report is based on a sample of the approximately 400,000 payrolls representing nearly 24 million U.S. employees that ADP processes for its clients. Employment at medium-size businesses, those with 50 to 499 employees, dropped by 255,000, or 0.6%, to 44 million in January, according to the report. Businesses with 500 or more workers cut 92,000 jobs, or 0.5% of total workers that month. They now employ 18.8 million...

I'll add some more random numbers from across the globe:

Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3 million in the US

Canada lost 129.000 jobs in January - equal to 1.2 million in the US

Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data

Let's see, where do we start? In Australia, one in 9 companies has fallen into the "high risk" category. In Britain, one in 150 went under in 2008. I don't like it when one country reports numbers that are 16 times higher than another. I don't believe Australia is doing 16 times worse than Britain.. I know that the UK data is from 2008, while Australia data forecast 2009, but still. And then of course, we see another British estimate that says a quarter of a million of Britain's smallest businesses are at risk of failure. Not of all businesses, just the smallest. That's more like it. How far off am I when I think the Insolvency Service is then off by a factor of 10 when it mentions 38.000?

In the US a small business is defined as one that employs 49 people or less. Unless the UK has a drastically different definition, it seems strange that nearly a quarter of a million of Britain's smallest businesses at risk of failure, place only 475,000 jobs in jeopardy. That's less than two people per business, and it would mean that most people work for themselves. I would think it's conservative and reasonable to suggest 5 jobs are lost on average from each failed small company. It may well be 10.

We could juggle the numbers a lot more, but the key to the whole exercise seems to be clear: there are discrepancies that are hard to explain. If Dun and Bradstreet in Australia expects 100.000 small business failures in 2009, Britain's number should be close to 300.000, not 38.000. And the US, with a population which is some 15 times larger than Australia, should expect 1.5 million small business failures. If we assume that the average number of employees is 5, Australia will lose 500.000 jobs, Britain 1.5 million, and the US 7.5 million. From small business alone, mind you. You can play around with definitions a little. In the US, medium sized businesses accounted for some 40% of job losses in January. my guess is that this will likely make the losses, in my example, quite a bit higher , and lift them well above 10 million lost jobs.

The US is not doing twice as good a Canada, as its official unemployment numbers indicate. Nor does it do twice as well as Spain, or 4 times better than Ireland. You only have to look at the president's urgency to get his plan approved in Congress to realize that. Does all this mean that the number of lay-offs in the US has to rise dramatically to be on par with other countries? I don't think that is the case. I get the feeling that official US unemployment numbers (still) simply play down real losses to a ridiculous extent, and that the real world is doing much worse than the one you see in the media. Obama should apply that urgency to cleaning up the government bureaus that spout out all the 'massaged' data. It's either that or stop talking about that believable change.

I think Washington is completely immune to the notion that in times of crisis, people want to know what really goes on. It's a culture of liars and cheaters, and nothing so far has changed. People accept being lied to as long as they're being pampered, the Bread and Circuses principle. Well, the bread is stale and the circus has moved on to a place beyond the horizon. And lying has become a risky business.

If you ask me, there's a very substantial risk that US job losses are much worse than what has been reported, and will be much worse than what has been forecast. How can you expect people to believe in the solution you offer if you refuse to tell them the true extent of the problem?

Ilargi: I'll try to pay some more attention to Japan tomorrow. We might want to try and learn a lesson or two from what is happening below the rising sun. A 10% decline in GDP in one year is devastating for any country. No matter what stimulus plan you have, the dominos are not going to stop falling for many years to come.

The Bank of Japan’s top researcher warned on Monday of an “unimaginable” contraction in the Japanese economy in the current quarter, as fresh figuresrevealed rapidly rising bankruptcies and a big fall in machinery orders. The comments from Kazuo Momma, head of the central bank’s research and statistics department, underscore the gloom surrounding the world’s second largest economy as export orders dry up, companies shut down production lines and consumers snap shut their wallets and purses. Japan, which saw industrial output plunge a record 9.6 per cent month-on-month in December, will announce fourth quarter gross domestic product data next week. Polls of economists suggest that GDP will have fallen more than 3 per cent compared with the previous quarter – an annualised decline of well over 10 per cent.

“From October to December the scale of negative growth (in GDP) may have been unimaginable – and we have to consider the possibility that there could be even greater decline between January and March,” Mr Momma warned in a speech yesterday. It would be “quite a while” before inventories would be fully adjusted and output recover, Mr Momma said, according to a report on Reuters Japanese language service. “The tunnel’s exit cannot yet be seen,” he said. Mr Momma’s remarks came as a private research firm reported a 16 per cent year-on-year rise in the number of bankruptcies among Japanese companies to 1,360 in January – the highest level for six years. Total debts left by failed companies rose 44 per cent from a year earlier to Y839bn, Tokyo Shoko Research said.

Many of Japan’s companies have suffered the effect of the domestic slowdown and a sudden dearth of demand for key export products such as automobiles and electronics, as well as difficulties winning credit from banks made cautious by the global financial crisis. The effect on corporate capital spending has been marked, with core private-sector machinery orders plunging 17 per cent quarter-on-quarter in the three months to December, their fastest fall on record. However, in a rare recent example of a Japanese economic indicator surprising on the upside, the month-on-month fall in core machinery orders in December was down just 1.7 per cent, much less than expected. Economists drew little comfort from this patch of lighter grey in the economic gloom.

“Even after this slightly better-than-expected showing, orders were still down by just under 27 per cent compared to a year earlier,” wrote Ben Eldred of Daiwa Securities in a research note. “The inescapable conclusion [from recent data] is that the Japanese authorities need to do more…if the Japanese economy is to avoid becoming the worst affected of all the developed economies from the current global downturn,” Mr Eldred wrote. The Japanese gloom was replicated in Taiwan, which last month suffered its biggest-ever monthly drop in trade activity, indicating that falling consumer demand in Europe and the US is severely hurting the island's export-oriented economy.

Asia's sixth-largest economy saw January exports fall by 44.1 per cent from a year ago, the biggest decline since government records began in 1972. It also marked the fifth consecutive month that exports have shrunk. The sharp fall was partly due to the effects of the Chinese New Year falling earlier than usual in 2009 and “continued shrinkage in external demand as a result of the global financial crisis”, the ministry of finance said yesterday.

Japan's current account surplus has fallen 92.1 percent in December from a year earlier, as exports declined amid a deepening global recession. The Finance Ministry said Monday that the surplus in the current account -- the broadest measure of Japan's trade with the rest of the world -- stood at 125.4 billion yen ($1.36 billion) in December. That marks the 10th consecutive month of year-on-year declines. The ministry said Japan's current surplus shrank 34.3 percent to 16.2 trillion yen ($176.96 billion) in 2008.

The Anglo-Saxon model of supervision and regulation of the financial system has failed, Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University, told the Financial Times on Monday. Answering questions from FT.com readers, Prof Roubini, who is widely credited with having predicted the current financial crisis, said the supervisory system “relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail because – as a former chief executive of Citi put it – when the music is playing you gotta stand up and dance.”

“All the pillars of Basel II have already failed even before being implemented,” he added, referring to the internationally agreed set of banking regulations that are forcing banks to set aside more capital to maintain their existing lending. Prof Roubini also predicted that it was possible another large bank could fail, saying: “In many countries the banks may be too big to fail but also too big to save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system”. He also criticised the US and UK approach to bank bail-outs, comparing it with attempts by Japan in the 1990s to solve its banking crisis. “The current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze,” he said.

Global bond markets are calling the bluff of the US Federal Reserve. The yield on 10-year US Treasury bonds – the world's benchmark cost of capital – has jumped from 2pc to 3pc since Christmas despite efforts to talk the rate down. This level will asphyxiate the US economy if allowed to persist, as Fed chair Ben Bernanke must know. The US is already in deflation. Core prices – stripping out energy – fell at an annual rate of 2pc in the fourth quarter. Wages are following. IBM, Chrysler, General Motors, and YRC, have all begun to cut pay. The "real" cost of capital is rising as the slump deepens. This is textbook debt deflation.

It was not supposed to happen. The Bernanke doctrine assumes that the Fed can bring down the whole structure of interest costs, first by slashing the Fed Funds rate to zero, and then by making a "credible threat" to buy Treasuries outright with printed money. Mr Bernanke has been repeating this threat since early December. But talk is cheap. As the Fed hesitates, real yields climb ever higher. Plainly, the markets do not regard Fed rhetoric as "credible" at all. Who can blame bond vigilantes for going on strike? Nobody wants to be left holding the bag if and when the global monetary blitz succeeds in stoking inflation. Governments are borrowing frantically to fund their bail-outs and cover a collapse in tax revenue. The US Treasury alone needs to raise $2 trillion in 2009.

Where is the money to come from? China, the Pacific tigers and the commodity powers are no longer amassing foreign reserves ($7.6 trillion). Their exports have collapsed. Instead of buying a trillion dollars of extra bonds each year, they have become net sellers. In aggregate, they dumped $190bn over the last fifteen weeks. The Fed has stepped into the breach, up to a point. It has bought $350bn of commercial paper, and begun to buy $600bn of mortgage bonds. That helps. But still it recoils from buying Treasuries, perhaps fearing that any move to "monetise" Washington's deficit starts a slippery slope towards an Argentine fate. Or perhaps Bernanke doesn't believe his own assurances that the Fed can extract itself easily from emergency policies when the cycle turns.

As they dither, the world is falling apart. Events in Japan have turned deeply alarming. Exports fell 35pc in December. Industrial output fell 9.6pc. The economy is contracting at an annual rate of 12pc. "Falling exports are triggering a downward spiral of production, incomes and spending. It is important to prepare for swift policy steps, including those usually regarded as unusual," said the Bank of Japan's Atsushi Mizuno. The bank is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.

This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe. The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.

Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going. Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies. The ECB's obduracy has nothing to do with economics. It fears zero rates as a vampire fears daylight, because that brings the purchase of eurozone bonds ever closer into play.

Any such action would usher in an EMU "debt union" by the back door, leaving Germany's taxpayers on the hook for Club Med liabilties. This is Europe's taboo. Meanwhile, Eastern Europe is imploding. Industrial output fell 27pc in Ukraine and 10pc in Russia in December. Latvia's GDP contracted at a 29pc annual rate in the fourth quarter. Polish homeowners have had the shock from Hell. Some 60pc of mortgages are in Swiss francs. The zloty has halved against the franc since July. Readers have berated me for a piece last week – "Glimmers of Hope" – that hinted at recovery. Let me stress, I was wearing my reporter's hat, not expressing an opinion. My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.

The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages. The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed. The total already tapped has decreased about 1 percent since November, mostly because foreign central banks are using fewer dollars in currency-exchange agreements called swaps.

The Senate is to vote early this week on a stimulus package totaling at least $780 billion that President Barack Obama says is needed to avert a deeper recession. That measure would need to be reconciled with an $819 billion plan the House approved last month. Only the stimulus package to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates approved in 2008 have been voted on by lawmakers. The remaining $8 trillion in commitments are lending programs and guarantees, almost all under the authority of the Fed and the FDIC. The recipients’ names have not been disclosed.

"We’ve seen money go out the back door of this government unlike any time in the history of our country," Senator Byron Dorgan, a North Dakota Democrat, said on the Senate floor Feb. 3. "Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?" The pledges, amounting to almost two-thirds of the value of everything produced in the U.S. last year, are intended to rescue the financial system after the credit markets seized up about 18 months ago. The promises are composed of about $1 trillion in stimulus packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to provide aid.

Federal Reserve lending to banks peaked at a record $2.3 trillion in December, dropping to $1.83 trillion by last week. The Fed balance sheet is still more than double the $880 billion it was in the week before Sept. 17 when it agreed to accept lower-quality collateral. The worst financial crisis in two generations has erased $14.5 trillion, or 33 percent, of the value of the world’s companies since Sept. 15; brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc.; and led to the takeover of Merrill Lynch & Co. by Bank of America Corp. The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.

"The Fed, Treasury and FDIC are pulling out all the stops to stop any widespread systemic damage to the economy," said Dana Johnson, chief economist for Comerica Inc. in Dallas and a former senior economist at the central bank. "The federal government is on the hook for an awful lot of money but I think it’s needed to help the financial system recover." Bloomberg News tabulated data from the Fed, Treasury and FDIC and interviewed regulators, economists and academic researchers to gauge the full extent of the government’s rescue effort. Commitments may expand again soon. Treasury Secretary Timothy Geithner postponed an announcement scheduled for today that was to focus on new guarantees for illiquid assets to insure against losses without taking them off banks’ balance sheets. The Treasury said it would delay the announcement until after the Senate votes on the stimulus package.

The government is already backing $301 billion of Citigroup Inc. securities and another $118 billion from Bank of America. The government hasn’t yet paid out on any of the guarantees. The Fed said Friday that it is delaying the start a $200 billion program called the Term Asset-Backed Securities Loan Facility, or TALF, to revive the market for securities based on consumer loans such as credit-card, auto and student borrowings. Most of the spending programs are run out of the Federal Reserve Bank of New York, where Geithner served as president. He was sworn in as Treasury secretary on Jan. 26. When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and then Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. The Federal Reserve so far is refusing to disclose loan recipients or reveal the collateral they are taking in return. Collateral is an asset pledged by a borrower in the event a loan payment isn’t made.

Bloomberg requested details of Fed lending under the Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral. Arguments in the suit may be heard as soon as this month, according to the court docket. Bloomberg asked the Treasury in an FOIA request Jan. 28 for a detailed list of the securities it planned to guarantee for Citigroup and Bank of America. Bloomberg hasn’t received a response to the request.

The securitisation markets, for many years the biggest source of funding for mortgages and consumer lending, may not return to “normal” until at least 2011, a survey of hundreds of industry participants shows. The gloomy expectations from industry insiders – who might be expected to be more optimistic than outsiders because they believe in the market’s importance to the economy – further highlights the importance of US government and Federal Reserve actions to find ways to plug this financing gap.

For years, the sale round the world of thousands billions of dollars of securities backed by mortgages, auto loans, credit cards and student loans fuelled the boom in credit. In 2007, securitisations accounted for half of the $5,655bn of money raised in the US credit markets, according to the American Securitisation Forum.This source of funding has dried up, as the plunge in house prices and the economic downturn has triggered losses on thousands of billions of dollars of securities, many of which had been considered safe investments. This has shattered confidence and left banks and investors hit by losses.

Addressing these “toxic assets” is seen as essential to restoring confidence and is expected to be a vital part of Treasury Secretary Tim Geithner’s financial rescue plans this week. “Unless traditional investors return to the asset-backed market, it will be difficult to wean the market off the low-cost financing provided by the government,” said Joseph Astorina, a securitisation analyst at Barclays Capital. The pessimistic outlook from securitisation industry participants, thousands of whom are in Las Vegas for a get-together, marks a dramatic shift from last year. A year ago, the industry thought the credit crisis would largely to over by the end of last year. Now, 43 per cent of 450 respondents did not expect a return to normal until 2011; 25 per cent expect market problems to last until 2012 or beyond. Nearly 7 per cent never expect a return to normal.

On Friday, the Fed revealed financing terms for a $200bn lending facility that will see the central bank taking on the role traditionally played by banks, that of providing debt to hedge funds and other investors. Through the term asset-backed securities loan facility the Fed is offering cheap financing so hedge funds can buy securities backed by auto loans and credit card loans. If it works, it could be extended to finance the buying of securities backed by mortgages and other assets. The survey higlighted four issues seen as most important to fixing the markets: addressing the overhang of distressed assets; changing investor sentiment; restoring confidence in rating agencies and improving transparency and disclosure practices.

But what took him so long? I personally find Soros' plan quite messy, it would force the nation(s) to walk around with side pockets full of toxic nuclear material. Forcing a clean break with the banks is much easier and better. Stiglitz proposes different options for different countries, which is confusing, Let him make up his mind first.

The truth of a proposition is independent of how many people believe it to be correct. The merits of a proposal are likewise not enhanced by the number of people supporting it or making similar proposals. Still, humans, like other pack animals, thrive on companionship. It is therefore comforting that the logic behind my proposal (January 29, 2009) for one or more new ‘good banks’ to be established, capitalised with public money and with additional financial support from the state for new lending and new funding, while the toxic assets of the old banks are left with the owners and creditors of the ‘legacy banks’, is being echoed in proposals from Joseph Stiglitz (February 2, 2009), George Soros (February 4, 2009) and Paul Romer (February 6, 2009), to name but a few. I claim no authorship or originality for the ‘good bank’ proposal. The idea is obvious and no doubt was floating around the blogosphere and elsewhere as soon as the magnitude of the insolvency disaster in the banking sector became apparent.

The various proposals differ in detail. Romer’s proposal is essentially the same as my own. Stiglitz argues, according to the British Daily Telegraph that "the government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice". Soros proposes not to remove the toxic assets from the banks’ balance sheets (which would require them to be valued, which is not possible) but instead put them into a "side pocket". The necessary amount of capital — equity and unsecured debentures — would be sequestered in the side pocket. Soros’ ‘side pocket’ is effectively the same as my ‘legacy bad banks’. Soros notes that about $1.5 trillion is likely to be required to recapitalise the existing banks properly. This money could be leveraged a lot more effectively if most of it were injected into the new good banks, unencumbered with the toxic waste of the existing banks.

Under the Soros proposal, some additional capital might have to be injected into the ‘side pockets’, presumably by the state. Under my new good banks proposal, the new good banks would take on the (guaranteed or insured) deposits of the legacy bad banks (which would lose their banking licenses) and would buy the good assets of the legacy banks. Should deposits exceed good assets, the state would have to make up the difference initially with government debt on the balance sheet of the new good banks. Should deposits be less than good assets, the new good banks would be able to borrow from the sovereign to finance the acquisition of the good assets from the legacy bad banks. This would cleanse bank balance sheets and transform them into good banks but leave them undercapitalized. Soros suggests that $1 trillion of the estimated $1.5 trillion required to recapitalise the existing banking system should be directed to the cleansed banks. Soros believes or hopes that some of the money required to capitalise the new, cleansed banks could come from the private sector. Under my proposal, and that of Stiglitz, the state would initially capitalise the new banks on its own.

The logic is simple. Many (probably most, possibly all but a handful) high-profile, large border-crossing universal banks in the north Atlantic region are dead banks walking - zombie banks kept from formal insolvency only through past, present and anticipated future injections of public money. They have indeterminate but possibly large remaining stocks of toxic - hard or impossible to value - assets on their balance sheets which they cannot or will not come clean on. This overhang of toxic assets acts like a tax on new lending. Banks are required, by regulators or by market pressures, to hoard capital and liquidity rather than engaging in new lending to the real economy. The public financial support offered in the form of capital injections (in the US mainly through preference shares and other non-voting equity), guarantees for assets and for liabilities (old and new), insurance of toxic assets (as provided to Citigroup by the US sovereign) and possibly in the future through direct purchases by the state of toxic assets (using TARP money in the US) and the creation of one or more publicly owned ‘bad banks’ has been a complete failure. The bad bank proposals the Obama administration and other governments are considering are non-starters, for the simple reason that they require the valuation of assets whose true value (even on a hold-to-maturity basis) can only be guessed at. The good bank proposal only requires the valuation of those assets on the balance sheets of the existing banks that are easy to value: transparently valued assets. The toxic stuff is left on the balance sheet of the existing banks, which become the legacy bad banks.

Offering to pay enough to the existing owners of the toxic assets to induce these owners to sell them would require paying over the odds. That might not leave enough fiscal resources to support the new lending activities that are so urgently needed. It would also be an unfair and moral-hazard-maximising bail out of the existing owners and creditors of the banks. Nationalising the dodgy banks (or even the entire cross-border universal banking sector) would only solve the valuation problem of the new owner (the state) after nationalisation. The toxic assets could be transferred into a bad bank at any valuation, including zero. The owner of the bad bank and of the cleansed bank are the same. Nationalising the dodgy banks would not solve the problem of how much to pay for the banks, however, because that would depend in part on the valuation of the toxic assets. The good bank proposal creates new, publicly owned banks which only purchase good assets from the legacy bank. There is no valuation issue involving toxic assets for the tax payer. The existing packages of support measures in the US, the UK and elsewhere have failed to get lending to the real economy going again. In the US especially, but also to some extent in the UK, It has been a shameful boondoggle for the banks that are at the heart of the financial mess - bank CEOs and other top managers, bank shareholders, holders of unsecured bank bank debt (subordinated, junior and senior) and other creditors.

The US, the UK and several other continental European countries are at risk of emulating Ireland, where the government first guaranteed all the liabilities of the banks (other than equity) and only after that began to nationalise the banks. This leaves the Irish government today in the not too enviable position of having to choose between sovereign default and bleeding the tax payer and the beneficiaries of normal public spending to make whole all the creditors of the banks. Bailing out the holders of existing bank debt and other bank creditors would be outrageously unfair: they did the lending and made the investments, they should eat the losses. In addition, many of the creditors are likely to be much better off, even after they write down/off their claims on the banks, than most of the tax payers and public expenditure beneficiaries that pay for the bail out. Bailing out the existing creditors would also create dreadful incentives for excessive future risk taking by banks. Especially in the US, the disdain for moral hazard displayed since the beginning of the crisis by regulators and by the fiscal and monetary authorities has been shocking. It has been justified with the claim that you cannot afford to worry about medium- and long-term incentives for appropriate risk taking when your house is on fire. That argument is logically flawed.

Two things are systemically important. The first is to restore the operation of key financial markets that have become illiquid. The Fed is doing a reasonable job in that regard. The second is to restore bank lending to the real economy. Neither objective requires that the existing banks be saved, let alone that their existing shareholders and creditors receive any financial support from the state. We can save banking without saving the banks or the bankers. The ‘good bank’ proposal demonstrates how to do this. Regulators, central bankers and policy makers should be pursuing three key objectives. The first is to get lending by the banks to the real economy, especially to the non-financial enterprise sector, going again. The second is to minimize moral hazard by creating the right incentives for future risk taking by banks, their creditors and their customers, by ensuring that the losses incurred by the failed banking system are born first and foremost by those who invested in the banks in any capacity. For reasons that are partly sensible (protecting small unsophisticated savers from financial ruin and forestalling inefficient attempts by financial illiterates to monitor complex financial institutions) and partly populist pandering, most retail deposits have ended up insured or guaranteed by the state (often at least in part ex-post). Moral hazard should be stopped, however, beyond the magic circle the state has drawn around retail depositors. The third objective is to pursue justice in burden sharing.

The legacy bad banks would, under their existing ownership and with whatever balance sheet they end up with after shedding their insured/guaranteed deposits and after selling their good, easily valued assets, have as their sole activity the management of their existing assets. No new investments would be undertaken, no new loans made and no other new exposures incurred. Their liabilities and other funding decisions would be managed in the interests of the existing shareholders. No doubt many of them would fold. Chapter 11 or Chapter 7 would be ready and waiting for them. By focusing scarce fiscal resources on supporting flows of new lending and new funding to support new lending, rather than on supporting stocks of existing bad assets and/or toxic assets assets and on guaranteeing or insuring stocks of existing liabilities, the state meets its three key objectives. First, its short-run economic stabilisation and crisis-fighting objective; second, its medium and long-term banking sector incentive-enhancing, moral-hazard-minimising objective; and third, its fairness objectives: the polluter pays or, you break it, you own it. Establishing legal and institutional clear water between the legacy bad banks and the new good banks is a necessary condition for fulfilling the economic imperative to support flows of new lending and borrowing rather than to protect existing stocks of toxic assets and their owners.

Treasury Secretary Timothy Geithner delayed the announcement of the Obama administration’s financial-recovery plan as officials debated proposals aimed at addressing the toxic debt clogging banks’ balance sheets. Some aspects of the plan, to be announced by Geithner tomorrow in Washington, have been settled. They include a new round of injections of taxpayer funds into banks, targeted at firms identified by regulators as most in need of new capital, people briefed on the matter said. A Federal Reserve program designed to spur consumer and small-business loans will be expanded, possibly to include real-estate assets, they said.

Still outstanding is the issue Geithner’s predecessor failed to address: the illiquid assets that have caused the credit freeze. Officials continue to consider a so-called bad bank to buy them, perhaps in cooperation with private investors, such as hedge funds and private equity. It’s unclear how big a role there’ll be for federal guarantees of securities that remain on banks’ balance sheets. Banks are "looking for clarity, we’re looking for this to be the complete package," said Wayne Abernathy, an executive vice president at the American Bankers Association in Washington. "If they don’t have the details spelled out they will just freeze the market."

Stocks in Europe and Asia fell and U.S. futures declined, with the Dow Jones Stoxx 600 Index slipping 0.5 percent. Japan’s Nikkei 225 Stock Average declined 1.3 percent and Standard & Poor’s 500 Index futures fell 13 points to 857.70 points. Delayed Speech Officials said yesterday the one-day delay was to allow the administration to focus on getting Senate approval of President Barack Obama’s fiscal stimulus. Still, the announcement coincided with continued discussions on the details of the plan. Geithner is scheduled to unveil the effort at 11 a.m. tomorrow. For now, the government doesn’t intend to ask for more money, while leaving open the option of requesting more later. Most of the second half of the $700 billion Troubled Asset Relief Program has yet to be allocated, an amount that economists have said is unequal to the task of shoring up the financial industry.

"Credit markets in this country are not working right" and "we’ll do what is necessary" to start a process of repair, Lawrence Summers, director of the White House National Economic Council, said on ABC television’s This Week program yesterday. Asked if the administration may come back to ask for more money down the road he said "we’ll see what happens." Geithner will try to sell the plan as a clean break from the Bush administration, while offering many of the same programs and policy tools bequeathed by former Secretary Henry Paulson. The round of equity injections planned will contrast with Paulson’s initial push to make new capital available to all banks, and the firms that get additional money will be faced with tougher terms, people briefed on the matter said.

"We’ve got to characterize this not as saving the banks, but saving the economy in terms of the credit that flows in this country," Senator Claire McCaskill, a Missouri Democrat, said yesterday on NBC’s Meet the Press. The Federal Deposit Insurance Corp. is expected to play a role either running or financing some bad bank type of unit that takes on illiquid securities, which may sell its own government- backed debt, the people said. Also this week, officials may seek to boost the FDIC’s credit line with the Treasury to $100 billion from $30 billion. The FDIC’S deposit-insurance fund is diminishing as it takes on more failed banks.

Geithner’s plan may include an asset-guarantee element similar to previous deals arranged for Citigroup Inc. and Bank of America Corp., while it’s not clear how big a role such insurance would play in tomorrow’s announcement, the people said. The new approach comes four months after the start of the $700 billion TARP, which both Democrats and Republicans have criticized as ineffective. The task Geithner faces is reviving a U.S. banking system throttled by $752 billion in credit losses and an economy that lost almost 600,000 jobs last month.

Economic news this week is expected to show a further deterioration. Sales at U.S. retailers probably fell in January for a seventh straight month, capping the longest slide since comparable records began in 1992. The Commerce Department report will probably show purchases declined 0.8 percent, according to the median estimate in a Bloomberg News survey. A Labor Department report last week showed the U.S. unemployment rate climbed to 7.6 percent, its highest level since 1992. White House Council of Economic Advisers Chairman Christina Romer warned last week that the rate may climb to 10 percent or higher without approval of Obama’s stimulus package, which exceeds $800 billion.

With the economic downturn deepening, attracting private money to the financial industry may be difficult. The Standard and Poor’s 500 Banks Index has fallen 35 percent since the start of last month, and 66 percent in the past year. Bank of America plunged 57 percent in the past month, closing at $6.58 last week even after the government agreed to backstop a portfolio of more than $100 billion of its assets. Citigroup, which got a joint federal guarantee for investments in excess of $300 billion, closed at $3.91.

The Obama administration will seek to "catalyze and spur private investment" to help solve the crisis, Summers said in an interview on Fox News Sunday yesterday. Housing programs will be a key element of the administration’s plan, though may be announced separately from the bank-rescue rollout. House Financial Services Committee Chairman Barney Frank said yesterday that Obama will steer "substantial" funds to stem foreclosures as the administration prepares to unveil its plan for stabilizing the economy. "A major part of what you’re going to see from the Obama administration is an effort to put substantial money into reducing foreclosures," Frank, a Massachusetts Democrat, said on NBC’s "Meet the Press."

As the Obama Administration prepares to announce its plans to stabilize the financial sector and deploy the remainder of last fall’s $700 billion in financial-bailout funds, one key obstacle looms large: How to value the toxic assets weighing down banks and other financial firms. The administration’s proposal, which is likely to include measures to help homeowners as well as banks, seemed to still be in flux over the weekend, and its announcement, originally scheduled for Monday, was pushed back to Tuesday to avoid drawing attention from efforts to pass a massive economic stimulus bill championed by the administration. The Treasury seems intent on bringing in private-sector investors to buy, and thus price, assets. That would lend credibility to the prices arrived at in the process, and could also help ensure that the effort is big enough to handle the volume of toxic securities out there. But attracting private investors will require government guarantees against at least some losses on the assets to draw sufficient private investment. And in the end, setting a price on those guarantees is very much the same as figuring out the value of the underlying assets.

That central challenge is little changed since two prior efforts to resolve the toxic-asset problem. Pay too much, and banks get a subsidy at taxpayers’ expense; pay too little and banks won’t want to sell – or will do so anyway, and wind up so poorly capitalized they fail or require more government assistance. Or, with guarantees, if the government charges too little, banks and outside investors are getting a taxpayer subsidy; it the government charges too much for the guarantee, it will find no takers, or banks and investors will lose out. A report last week from the Congressional Oversight Panel policing the Treasury's financial bailout underscored just how tough it can be to price investments. The report concluded that the government overpaid when buying preferred shares in big banks last fall by about 33% on average, which the panel blamed in part on the Treasury's decision to invest in all the banks on the same terms under its Capital Purchase Program. Yet finding a way to price assets accurately – or, more importantly, setting prices that buyers and sellers will agree on – is critical to unlocking the credit markets.

The fundamental problem is that banks and investors value the assets differently. Investors won’t pay what banks want for the home, auto, construction and other loans on their books; banks won’t take what investors are willing to pay, for fear of having to take more massive writedowns. And as long as investors don’t trust the asset values on bank balance-sheets, banks won't get much more private capital, further constraining their lending. Government capital injections alone won’t do much to solve this, financial experts say; as long as the questionable assets remain on bank books, and remain so opaque, investors will continue to worry about new blow-ups. The upshot: Without resolving the pricing issue, it could take years for asset prices to shake out, raising the specter of a long, drawn-out crisis like the one Japan faced in the 1990s. Enter government guarantees, widely understood to be at the heart of the Obama Administration's plan. With a guarantee against losses, private investors should be willing to step in and buy the bank assets, even at the risk of overpaying. But even here, the government has to somehow value the guarantee it is providing, in order to charge investors a premium: if it charges too little -- or nothing -- it is essentially handing out a taxpayer subsidy; if it charges too much, investors won't be interested, and the assets will languish on banks' books.

Officials involved with two prior efforts to price toxic real-estate assets says it proved among the biggest challenges they faced on the housing front. Early drafts of last summer's Hope for Homeowners legislation included a program under which the government would buy up iffy assets from banks, along the lines of the Troubled Asset Relief Program that Treasury Secretary Henry Paulson later proposed. Federal Reserve and congressional staff spent hours trying to establish how to reliably set prices for such an endeavor, through reverse auctions or similar procedures, according to a person involved in the discussions. The vehement opposition of the Paulson Treasury, and the Bush Administration generally, ultimately meant the provision was stripped from the bill. "It just seemed like a total bailout at the time," said one former administration official. But the official said it nonetheless formed the foundation of Paulson’s TARP as the financial crisis deepened in the fall. A "bad bank" structure, in which the government funds a quasi-private entity to buy up toxic assets – supplemented with private capital or borrowed Fed funds – poses essentially the same problem, as would an insurance program guaranteeing much of the potential losses on various assets. "They achieve the same thing, but the key hurdle for both of them is how do you do the pricing," whether of assets directly, or of an insurance premium, the former administration official says.

The administration’s financial-stabilization effort is likely to include multiple facets, and could extend beyond the $350 billion remaining of the $700 billion Congress set aside last fall. In addition to announcing a way to move toxic assets off banks’ books, the administration is expected to outline parameters for new capital infusions into banks and propose additional measures to prevent foreclosures and stop the housing market’s slide. Different portions of the proposal could be announced separately. On the housing front, the administration is likely to support letting judges modify more home loans in bankruptcy, a Democratic Senate aide says. Such proposals are popular among Democrats but loathed by the financial-services industry. The aide also says the administration is expected to propose legal protections for mortgage servicers, who say they fear lawsuits when modifications to mortgages harm some investors in securitized loans more than others. The Wall Street Journal reported over the weekend that the administration could also propose other features, from expanding a Federal Reserve program to finance investors buying consumer debt, to greater authority for the Federal Deposit Insurance Corp. to guarantee bank borrowing and to dismantle failing financial institutions. Last week, former Fed Chairman Paul Volcker, now a key adviser to Obama on long-term financial-regulation reform, warned a Senate committee that the effort is likely to be costly, toting up "lots of billions of dollars" more.

The easy part is coming to an end. Ask just about anyone in Washington involved in the $800-billion-plus economic stimulus legislation churning its way through Congress and they will tell you it is a milestone — but without question the less expensive, and politically and technically less chancy, part of the Great National Bailout of 2009. This week, President Obama and his Treasury secretary, Timothy F. Geithner, will prepare the country for the next, and far more difficult, step: another attempt to fill the huge hole blown in the center of the nation’s financial system.

No one has yet put a price tag on that effort. But the administration’s diagnosis of what went wrong with the first attempt to right the financial system — that it was too small, and that the problem has ballooned in recent months — suggests that the next effort will almost certainly entail a far bigger commitment of taxpayer dollars than the $350 billion left from last year’s $700 billion effort to right the system, and probably far more than the stimulus package. At his first news conference, scheduled Monday evening, Mr. Obama is expected to argue that the nation’s recovery depends on simultaneously firing on three cylinders. The stimulus that the House and Senate are now hashing out is one, intended to help create or protect jobs by funneling money to individuals, companies and state and local governments.

Unplugging the stoppage in the credit system that has kept consumers and businesses from borrowing the money they need, by shoring up shaky or failing banks, is the second part, and a vital one: offering a $15,000 tax credit to home buyers, administration officials argue, will not do much good if the buyers simply cannot get a mortgage. And the final part, which Mr. Obama is not expected to announce for days, involves spending billions of dollars more to prevent home foreclosures, for fear that the displacement and anger created by throwing people out of their homes, and putting more properties onto a glutted market, will create a psychological and financial death spiral. But while the president and his economic team had a playbook of sorts to follow when it came to the stimulus plan — since the Great Depression the federal government has been using big increases in spending and reductions in taxes to jolt the economy with varying degrees of effectiveness — the problems facing the financial system have no real parallels in scale or complexity.

The Bush administration tried to address the problems in its final months, but lurched from one approach to another, spending $350 billion with little to show for it, even as analysts came to the conclusion that the ultimate costs could reach into the trillions of dollars. "There’s a deep suspicion throughout the country because none of this worked the last time," one of Mr. Obama’s top economic advisers said. Even the lessons of what the Japanese did wrong a decade ago — failing to address their banking crisis quickly enough — is only of limited value. "There’s a real danger in looking at Japan, or even our own experience during the 1930s, for what works or doesn’t work," said Jeffrey E. Garten, a professor at the Yale School of Management who helped develop the Clinton administration’s economic strategies for Asia.

"Those problems arose at a different moment in the history of the global economy, when banks around the world were not so intertwined and when the financial sector wasn’t so critical to global growth," Mr. Garten said. Japan’s troubles, he said, barely affected international trade. "Today we have three interrelated problems: a collapse of the real economy, a collapse of the banking system, and rapidly shrinking world trade," he said. "If you treat one without treating the others, you are doomed. And right now, to the naked eye, nothing seems to be working." The stimulus package is the easiest element of the solution to understand, and the easiest to sell politically: just about every member of Congress can go home and explain how it benefits constituents. But as Mr. Geithner and his team have discovered as they try to put together the bank bailout, the politics are running against them. Bankers have become symbols of excess and greed, making the politics of pouring more money into propping up Wall Street and the financial system that much trickier.

"We know what we need to do: inject capital into the banks, clean up their balance sheets, get rid of the bad loans in their portfolios that are clogging up the arteries," a senior member of Mr. Obama’s economic team said, declining to speak on the record ahead of Mr. Obama’s news conference and Mr. Geithner’s announcement on Tuesday. "But the perception is that you are bailing out a bunch of Wall Street bankers, and even many Democrats are going to rebel at that." The new administration will have to develop convincing arguments that it has an approach that will work any better than the Bush approach did. Getting the banks to lend more is a prime example of the conundrum. Mr. Geithner’s first goal is to stabilize the banks, pumping in more capital to assure that they can weather the storms ahead.

As a result, while the Obama administration will encourage the banks to lend, top officials say they do not want to issue mandates. Yet they know that the first rescue effort was judged a failure precisely because many banks horded the money — or used it to acquire other banks. "The challenge is a political one: with the government putting a lot of funds into the banking system, Congress wants to see results, tangible results," said Laurence H. Meyer, who served on the Federal Reserve from 1996 to 2002 and is vice chairman of Macroeconomic Advisers. "But you don’t want the government in the position of deciding on loans," he said, "because they are not going to be any better at that than the private sector was last year." Moreover, once the government is involved in the decision there will be enormous pressure to lend to borrowers who might not be creditworthy, perpetuating the problem that triggered the problem.

"The fact is," Mr. Meyer said, "there are a lot fewer creditworthy borrowers now than there were a year ago," thanks to job losses and the erosion of assets.Mr. Meyer and other economists, however, say they are encouraged by the Obama administration’s exploration of ways to draw private investors back into the market for "toxic assets." If the price of those assets drops low enough, and the government is willing to guarantee investors against losses, "I think there is a lot of money on the sidelines that may come in to buy these up," Mr. Meyer said. "There’s a great profit opportunity here." To get to that point, however, the moment when the government can leverage private money to supplement taxpayers’ investments, will require a change in the national psychology. That, in the end, will be the administration’s greatest challenge.

The Obama administration's economic stimulus plan could end up wasting billions of dollars by attempting to spend money faster than an overburdened government acquisition system can manage and oversee it, according to documents and interviews with contracting specialists. The $827 billion stimulus legislation under debate in Congress includes provisions aimed at ensuring oversight of the massive infusion of contracts, state grants and other measures. At the urging of the administration, those provisions call for transparency, bid competition, and new auditing resources and oversight boards.

But under the terms of the stimulus proposals, a depleted contracting workforce would be asked to spend more money more rapidly than ever before, while also improving competition and oversight. Auditors would be asked to track surges in spending on projects ranging from bridge construction and schools to research of "green" energy and the development of electronic health records -- a challenge made more difficult because many contracts would be awarded by state agencies. The stimulus plan presents a stark choice: The government can spend unprecedented amounts of money quickly in an effort to jump-start the economy or it can move more deliberately to thwart the cost overruns common to federal contracts in recent years.

"You can't have both," said Eileen Norcross, a senior research fellow at George Mason University's Mercatus Center who studied crisis spending in the aftermath of Hurricane Katrina. "There is no way to get around having to make a choice." The government's mounting procurement problems can be traced to the Clinton and Bush administrations. Both decided to rely far more on the private sector for technology, personnel and other services, greatly increasing the value and complexity of the contracts. At the same time, the personnel that awarded and oversaw that work was reduced in the 1990s in efforts to downsize the government.

Since 2000, procurement spending has soared about 155 percent to almost $532 billion while the growth in the acquisition workforce has fallen far short, rising about 10 percent. Specialists say the raw numbers understate the challenges facing the 29,000 federal contracting personnel in civilian agencies across the government who will be asked to shoulder the burden of stimulus-related contracts. That's because much of the work they do now involves contracts for services, which are harder to issue and monitor than simply buying pencils and chairs. The government's watchdog infrastructure, including inspectors general, also will face new challenges. The House and Senate bills each include about $200 million in additional funding for inspectors general. But some observers say that may be insufficient given the demands.

Some supporters of the stimulus in Congress acknowledge the problems. Sen. Claire McCaskill (D-Mo.) said she has no doubt the Obama administration desires accountability and transparency. To achieve that, she has proposed spending more on contracting workers, investigators and auditors -- including about $60 million to hire about 600 more acquisition workers. "We have to beef up the acquisition personnel and the resources of the inspectors general or you cannot get to accountability," she said. "This bill isn't cheap, but it will cost us far more in the long run if we don't do this right." White House spokeswoman Jennifer Psaki declined to answer specific questions about problems with the acquisition system.

"In working with the Hill, we are trying to make sure that there is sufficient program management staff to ensure that money gets out the door quickly and wisely, and to provide sufficient oversight of funding decisions," she said. The Bush administration was plagued by allegations of fraud and abuse in billions of dollars worth of Homeland Security and wartime contracts, some of which were awarded in violation of federal regulations or failed to deliver. After the 2001 terrorist attacks, the government allowed a contract to hire airport screeners to grow to $741 million from $104 million, while failing to follow federal regulations designed to prevent fraud and abuse. Government contractors interviewed job applicants at five-star resorts and hotels, where auditors found they paid $1,180 for 20 gallons of Starbucks coffee, $1,540 to rent extension cords at one hotel and $5.4 million for nine months salary to the head of the event-planning firm that ran the show.

After Homeland Security officials acknowledged that they boosted the contract by $343 million without the paperwork necessary to justify the increase, they blamed the lapse on the need to move quickly. In the rush to respond to the devastation of Hurricane Katrina, federal authorities issued more than $10 billion in contracts, only about 30 percent through full-and-open competition, studies have found. The government ended up spending $2.7 billion on mostly no-bid contracts for 145,000 trailers and mobile homes, including 8,000 that were never used and 41,000 now being sold at 40 cents on the dollar.

"Overcharging has been frequent, and billions of dollars of taxpayer money have been squandered," a congressional study of federal contracting concluded two years ago. "Multiple causes -- including poor planning, noncompetitive awards, abuse of contract flexibilities, inadequate oversight and corruption -- have all played a part." Only part of the stimulus money would be spent through federal contracts, though it remains unclear how much. Much would be awarded as grants to states, which could then issue contracts or spend the money in other ways. Under the bill approved by the House, about $92 billion would be spent through the end of the current fiscal year. Some $225 billion would be spent next year and $159 billion would be spent in 2011, according to a review by the nonpartisan Congressional Budget Office. Including tax cuts, the total cost of the House-approved stimulus plan would be $816 billion.

To ensure the money is properly spent, lawmakers propose that contracts should be awarded under federal acquisition regulations, stressing that "fixed-price contracts" should be used. Such contracts can hold down costs. But in recent years, officials have increasingly turned to contracts that offer more alternatives. Contractors now receive about 45 percent of their revenue from "cost reimbursable" deals, according to a survey by Grant Thornton, a consulting firm. Such arrangements allow the government and contractors more flexibility but can lead to cost overruns without sophisticated oversight. To increase "transparency and oversight," the bill calls on local, state and federal agencies to announce the terms of certain contracts and grants on a new Web site called Recovery.gov. Oversight efforts would be guided by an "accountability and transparency board" composed of six members appointed by Obama, along with the president's "chief performance officer."

The nominee for the performance officer post, Nancy Killefer, withdrew last week after acknowledging she did not pay taxes for household help. A CBO analysis last month concluded that federal agencies and states "would find it difficult to properly manage and oversee a rapid expansion of existing programs." One problem, specialists say, is that the bill contains "use it or lose it" requirements mandating spending within 120 days. Kent Goodger, a federal contracting official for four decades who teaches procurement classes for the government, said it typically takes 180 days to award a standard firm, fixed-price contract. Advocates of the stimulus package say that much spending would occur through contracts that have already been awarded and projects already underway, or through "shovel-ready" efforts. The advocates say many of those projects have already been through the bid and vetting processes, and many, such as those relating to highway construction, will go through long-established funding channels between the federal government and the states.

The Council of Mayors has released a document detailing hundreds of municipal and public works projects it says fit that description. They include roadway projects, roof repairs, school renovations, playground equipment, Harley Davidson motorcycles for police, doorbells for housing and, for $600 million, an African American/ethnic heritage trail in Mississippi. Some specialists said it appears the government is poised to make the same sorts of mistakes it made after the 2001 terrorist attacks. The specialists say there is no systematic way to know how much of the contracting work has been done, even on the shovel-ready projects. "We don't have the means to make sure we don't blow through billions of dollars and give it to the wrong people," said Keith Ashdown, chief investigator at the nonpartisan Taxpayers for Common Sense. "We're on track to lose billions, if not tens of billions, to waste, fraud and abuse."

Goodger said the federal contracting system has been extremely troubled in recent years. He emphasized the lack of trained employees to manage contracts, which he called a "human capital crisis." Stan Soloway, president of the Professional Services Council, a group that represents government contractors, does not oppose the stimulus package. But he said the government appears to lack the planning and the "infrastructure and architecture" upfront to manage the spending. "Without it," he said, "we're going to have a repeat of what we've seen over and over and over, from major weapons systems to Katrina and Iraq."

Treasury Secretary Timothy Geithner is expected to announce that the government will become a partner with the private sector to purchase banks' troubled assets, according to people familiar with the matter. The plan for a so-called aggregator bank, a variation on a theme that Obama administration officials have wrestled with for weeks, is among four main components of Mr. Geithner's bailout revamp, which he is expected to announce Tuesday. The effort to restore confidence to the financial system comprises a broad range of tools and government agencies. It includes fresh cash injections into banks; new programs to help possibly 2.5 million struggling homeowners; a significant expansion of a Federal Reserve program designed to jump-start consumer lending; and, lastly, the mechanism to allow banks to get rid of bad assets.

The administration's plans have evolved over the past several weeks as it has considered and discarded a host of ideas, with financial markets anxiously awaiting details. Mr. Geithner had planned an announcement Monday but delayed it a day to allow the focus to remain on the stimulus bill in Congress. The aggregator bank, which some refer to as a "bad bank," would be designed to solve a fundamental challenge: How can banks purge themselves of their bad bets without worsening their weakened condition?

The entity would be seeded with funds from the $700 billion financial-sector bailout fund, but the idea is that most financing would come from the private sector. Some critical elements remained unclear, including exactly how the government would entice investors to participate in the private bank, given that they can already buy soured assets on the open market if they want to. The government will likely offer some type of incentive, such as limiting the risk associated with buying the assets. The administration hasn't settled on exactly how it will work and intends to hash out the structure with the private sector over the next few weeks, the people familiar with the matter said. Investors would likely buy a stake in the entity, which would then buy mortgage-backed securities and other troubled assets.

The government would also be an investor, but the terms aren't yet decided. The entity might also raise funds by selling government-backed debt or through financing from the Fed, the people familiar with the matter said. The Obama administration views the private bank as a way to get around the thorny issue of having to determine a price for soured assets such as certain mortgage-backed securities, many of which are illiquid and hard to value. The government has long worried that if it bought toxic assets and paid too much for them, banks would benefit at the expense of taxpayers -- while if the price was too low, it would force banks to take further write-downs and exacerbate their woes.

The Treasury's working theory for the government/private-sector partnership is that investors wouldn't overpay, because if they did, they'd stand to lose money; but they also wouldn't underpay, since the selling banks wouldn't be willing to part with their assets too cheaply. Bankers and investors cautiously welcomed the idea, saying it could help avoid more large-scale federal intrusions into the financial sector while tackling the bad-asset problem. Brian Sterling, co-head of investment banking for advisory firm Sandler O'Neill & Partners, called the idea an "interesting tool" worth exploring.

"We think that anything that helps facilitate taking nonperforming assets off bank balance sheets or putting a ringfence around them is a good thing," Mr. Sterling said. Some investors expressed concern about joining with the government in such an arrangement if the rules of engagement weren't guaranteed to remain consistent. Executives at J.P. Morgan Chase & Co. have been cool to the idea of selling assets into a "bad bank" structure. They believe it may be wiser to hold on to sour assets that have already been written down, in the hope the bank can recoup losses when markets revive.

Many of the administration's ideas appear to build on policies begun under former Treasury Secretary Henry Paulson, whose handling of the bailout helped tar its reputation among lawmakers and the public. Mr. Paulson's plan initially envisioned buying toxic assets but shifted to having the government inject cash into banks in return for preferred stock. Many of the housing ideas under consideration also stem from work done in the Bush administration, illustrating the constrained range of options. Mr. Geithner is expected to sell the program as a break with the past, pitching it as a comprehensive framework to address the root causes of the financial crisis: defaulting loans and soured assets that are shaking confidence in banks.

Other likely elements of the plan, subject to last-minute changes, include: An expansion of the Fed's Term Asset-Backed Securities Loan Facility to include assets beyond the student-loan, auto-loan and credit-card debt it was set up to absorb. Under the revamp, the so-called TALF is likely to buy securities backed by commercial real estate and possibly other assets as well. The program was set up during the Bush administration to spur the consumer-loan market by providing financing for investors to buy securities backed by such loans.

A second round of cash injections in financial firms but with tougher terms, such as a requirement to modify troubled mortgages and better track the federal funds. The government is looking to get money into banks by buying preferred shares that convert into common shares in seven years; the idea is to avoid diluting current shareholders' stakes while helping banks better withstand losses. The Treasury may also allow banks that have already received capital to convert the Treasury's preferred shares to common stock over time. Giving the Federal Deposit Insurance Corp. power to help dismantle troubled financial firms beyond the depository institutions over which it now has authority. This could require legislation.

Mr. Geithner, his predecessor Mr. Paulson and Fed Chairman Ben Bernanke have said there needs to be a government entity empowered to wind down failed financial institutions that aren't banks. Regulators have said one problem the government faced when Lehman Brothers Holdings Inc. and American International Group Inc. ran into trouble was that no federal body had authority to step in and steer the firms toward an orderly demise. Having the FDIC guarantee a wider range of debt that banks issue to fund loans is also a likely element of the plan, said people familiar with the matter. The guarantees could help free up credit to both companies and consumers. Currently, the FDIC temporarily backs certain debt with a three-year maturity. Government officials could increase this to maturities up to 10 years.

More help for homeowners, at a cost of between $50 billion and $100 billion. The administration is expected to create national standards for loan modifications that would be adopted by mortgage giants Fannie Mae and Freddie Mac. The plan could include a mechanism to determine the value of homes facing foreclosure, which could speed negotiations with borrowers. The difficulty of valuing such homes is one reason many loan-modification efforts have stalled. A related move would see the government using taxpayer dollars to give mortgage companies an incentive to modify loans. One idea would help reduce interest rates for consumers by having the government match mortgage companies' interest-rate reductions to some degree. For instance, if a mortgage company agreed to shave one point off the rate on a loan, the government might match that so the rate would be reduced by two points. Mr. Geithner is also expected to express support for legislation that would allow judges to modify the terms of mortgages in bankruptcy court.

A public-relations makeover. To improve the bailout's poor image, which owes partly to the shifting nature of the government's remedies, the administration is considering renaming the $700 billion Troubled Asset Relief Program and making it independent of the Treasury. The U.S. is going to announce new terms and conditions for companies that receive or have already taken government aid -- in addition to the new executive-compensation limits announced this week -- including a demand that they report how the money is being spent.

Small-business job losses could double to 2 million by January 2010 as firms with as many as 49 workers continue an employment decline that started a year ago, a national economic forecaster says. "We're not done yet; you could easily see another 1 million small-business jobs lost," said Joel Prakken, chairman of Macroeconomic Advisers, the St. Louis firm that creates the monthly ADP National Employment Report with Automatic Data Processing Inc. of Roseland, N.J. In January, small-business employment racked up its 12th straight monthly decline, dropping 175,000 jobs, or 0.4%, from December to 49.9 million, according to the report released last week.

Since February 2008, when the total small-business job count was 50.9 million, small firms have cut 1 million, or about 2%, of their jobs. An additional 12 months of decline is probably in the cards before a turnaround, even with the passage of a stimulus package, said Prakken, who noted that employment typically lags behind the performance of the nation's gross domestic product. GDP plunged in the fourth quarter of last year, is expected to post a decline the first three months of this year and will probably contract in the second quarter as well, he said. "I think when we finally turn around it will be small business whose employment ramps up first," he said. But he is expecting "many more months of sharp declines."

The longest recent decline in small-business jobs lasted 10 months, from August 2001 to May 2002, when 381,000 jobs, or 0.8% of August's 46.7 million jobs, were lost. The jobs report is based on a sample of the approximately 400,000 payrolls representing nearly 24 million U.S. employees that ADP processes for its clients. Employment at medium-size businesses, those with 50 to 499 employees, dropped by 255,000, or 0.6%, to 44 million in January, according to the report. Businesses with 500 or more workers cut 92,000 jobs, or 0.5% of total workers that month. They now employ 18.8 million, according to the report, which is online at www.adpemploymentreport.com.

World stock markets were mixed Monday, with Tokyo's index down more than 1 percent, as a recent rally over the $827 billion plan to resuscitate the U.S. economy began to fade. Stocks have advanced strongly lately on expectations the U.S. measures, expected to pass the Senate Tuesday, will reverse the country's deepest recession in decades by stemming massive job losses and increasing spending. A coming overhaul of the government's $700 billion financial bailout program, to be detailed by Treasury Secretary Timothy Geithner on Tuesday, also has given sentiment a lift. Among new measures under consideration are guarantees to help banks limit losses from their souring assets. Yet most markets in Asia gave up some of their gains by the afternoon. Analysts say much of the rise has been fueled by investors looking to capitalize on the markets' momentum, not a fundamental shift in sentiment. "I don't think this rally will last," said Desmond Tjiang, who helps manage $4 billion in Asian equities as a chief investment officer at Fortis Investment Management in Hong Kong. "There's still bad macro news and bad corporate news that will outweigh the stimulus hopes in the near term," he said. "After the stimulus package, what other good news can there be? I'm just very cautious."

Japan's Nikkei 225 stock average fell 107.59, or 1.3 percent, to 7969.03, while South Korea's Kospi was off 0.6 percent at 1,202.69. Singapore and New Zealand stock markets also lost ground. In Hong Kong, the Hang Seng rose 0.8 percent to 13,769.06 in a volatile session that saw the benchmark turn negative. Boosting Hong Kong was trade in China, where the Shanghai index extended its recent gains by 2 percent. Stock measures in Australia, Taiwan and India were higher as well. As trading started in Europe, France's CAC 40 was off 0.5 percent, Germany's DAX slipped 0.3 percent and Britain's FTSE 100 was down 0.6 percent. In the U.S. Friday, investors looked past abysmal news about the country's job market and instead hoped it would increase pressure on lawmakers to pass the stimulus bill. The Dow industrials rose 217.52, or 2.7 percent, to 8,280.59 after rising 106 on Thursday. Broader stock indicators also jumped. The Standard & Poor's 500 index rose 22.75, or 2.7 percent, to 868.60. But Wall Street futures sank Monday, suggesting U.S. markets would shed some of last week's gain. Dow futures fell 76, or 0.9 percent, to 8,178 and S&P500 futures were down 11.1, or 1.3 percent, at 856.60. Earlier in Asia, there more signs of corporate distress.

In Japan, the government reported a decline in machinery orders, while Nissan Motor Co. said it was slashing 20,000 jobs and had fallen into the red in the fiscal third quarter. Japan's No. 3 automaker also forecast a net loss for the full year through March, providing fresh evidence of the pain Asia's exporters are feeling as Western consumers cut back their spending. "The economic realities in the United States and Japan are so dire that more investors are becoming skeptical over the U.S. economic and financial bailout plans," said Masatoshi Sato, market analyst at Mizuho Investors Securities Co. Ltd. "Optimism over the U.S. measures that had supported the market is gone." Meanwhile, Japan's biggest brokerage firm Nomura Holdings tumbled more than 14 percent on news it might be forced to sell more shares to raise capital. Recent gains in commodities prices boosted raw materials producers and the shipping firms that transport their goods. Australia's BHP Billiton Ltd, the world's largest mining company, gained 3.4 percent. Chinese aluminum producer Chalco advanced 6.7 percent in Hong Kong, helped by an analyst upgrade. Oil prices retreated modestly in Asian trade, with light, sweet crude for March delivery exchanging hands at $39.66 a barrel, down 51 cents. The contract dropped a dollar to settle at $40.17 a barrel on the New York Mercantile Exchange overnight. In currencies, the dollar weakened to 91.42 yen, down from 91.83. The euro traded at $1.2916, down from $1.2943.

Three months after their Election Day drubbing, Republican leaders see glimmers of rebirth in the party's liberation from an unpopular president, its selection of its first African American chairman and, most of all, its stand against a stimulus package that they are increasingly confident will provide little economic jolt but will pay off politically for those who oppose it. After giving the package zero votes in the House, and 0with their counterparts in the Senate likely to provide in a crucial procedural vote today only the handful of votes needed to avoid a filibuster, Republicans are relishing the opportunity to make a big statement. Rep. Pete Sessions (R-Tex.) suggested last week that the party is learning from the disruptive tactics of the Taliban, and the GOP these days does have the bravado of an insurgent band that has pulled together after a big defeat to carry off a quick, if not particularly damaging, raid on the powers that be.

"We're so far ahead of where we thought we'd be at this time," said Rep. Paul D. Ryan (R-Wis.), one of several younger congressmen seeking to lead the party's renewal. "It's not a sign that we're back to where we need to be, but it's a sign that we're beginning to find our voice. We're standing on our core principles, and the core principle that suffered the most in recent years was fiscal conservatism and economic liberty. That was the tallest pole in our tent, and we took an ax to it, but now we're building it back." The second-ranking House Republican, Rep. Eric Cantor (Va.), put it more bluntly. "What transpired . . . and will give us a shot in the arm going forward is that we are standing up on principle and just saying no," he said.

The fact that the stimulus legislation keeps moving forward nonetheless has done nothing to dim Republicans' satisfaction. Rather, they sense a tactical victory, particularly in the framing of their opposition to the plan as a clash with congressional Democrats instead of with President Obama, who remains far more popular with voters than does Congress. Republicans are holding congressional Democrats responsible for the wasteful spending they say is in the stimulus package, even though most of the big-ticket items -- for renewable energy, health care and schools -- are ones that Obama wanted in the package to advance his long-term goals.

For a while, the president did not exactly resist this tack, leaving the impression that the bill is mainly a congressional creation, but he started to defend it more vigorously last week. It is a triangulation of sorts, with Republicans hoping to drive a wedge between congressional Democrats and Obama. "The president has done a good job reaching out to Republicans, and he has said he wants to approach this crisis . . . on a bipartisan basis. That's good, and we're willing to work with him on that. But this bill is not the president's bipartisan plan," Sen. John Cornyn (R-Tex.) said yesterday on "Fox News Sunday."

Tom Davis, who retired from his Northern Virginia congressional seat last month, has long warned about the party's decline among moderate suburban voters. But with George W. Bush now off the national stage, Davis is upbeat about the party's prospects in its initial tests: the House seat in Upstate New York that had been held by Sen. Kirsten Gillibrand (D), and Virginia's gubernatorial race. "There was such antipathy to Bush, and you take him out of it and a lot of the Democrats' energy evaporates. It doesn't change the poll numbers, but it changes the energy," he said. "That's why these elections are going to be different." The flash of triumphalism -- fueled further by schadenfreude over the tax troubles of some of Obama's Cabinet nominees -- is not without risk. Voters hungering for a response to hard times may see the GOP's battle against the stimulus package as unsympathetic to their plight. And Obama may decide it is not worth reaching out to Republicans on future legislation.

The party is also likely to be less unified on the final vote on the stimulus package. Rep. Michael N. Castle (Del.), one of a dwindling number of moderate Republicans in the House, said he hopes the bill will improve enough in its final version so he can vote yes. "I'm always concerned when the Republican Party takes a negative position on something that should be moving forward," he said. "I believe there could be a good stimulus package, and hopefully we've created enough doubt that they'll work it out in the Senate." Democrats scoff at the Republicans' claim to regrouping, saying the declarations against big spending are undermined by the deficits that were run up under Bush and GOP congressional leadership. The stand against the stimulus appeared to be more rejectionist than the discovery of a new approach for moving forward, they said.

"That 'no' vote was a very tentative first move, and it remains to be seen what level of engagement and cooperation they're going to give the president," said Joel Johnson, who served as a policy adviser to President Bill Clinton. "It is much easier, when you're not sure what your strategy is, to revert to a 'no' strategy, and that's what they did." The Republicans' bravado comes amid another sign of the depth of the party's plight: Data from Gallup show that the Democrats' edge in party identification is larger than it has been since 1983. The GOP's 178 House members, concentrated in the South, are its lowest total since 1993; it is clinging to the 41 Senate seats it needs to uphold a filibuster; it holds 21 governorships and has lost clout in state legislatures. The solidarity against the stimulus package also glosses over a divide over comeback strategy. Many Republicans see this moment as equivalent to 1993, when the party handled a new Democratic president by resisting and capitalizing on any perceived overreach.

The party, these Republicans say, need only hold true to its small-government principles for a center-right electorate to gravitate back. That means rejecting the stimulus package and offering in its place an alternative package centered mostly on tax cuts, as House Republicans did last week. It also means focusing the stimulus critique on relatively small slivers of the package that echo old culture wars, such as spending for contraceptives and for the National Endowment for the Arts. And it means rallying to Rush Limbaugh, who has put himself forward as a de facto party leader, penning an op-ed article in the Wall Street Journal and accepting the on-air apologies of Rep. Phil Gingrey (R-Ga.), who criticized the radio host and paid for it in a deluge of angry calls.

"If you get the principles right in the first place . . . the politics will take care of itself," said Rep. Jeb Hensarling (R-Tex.), a leader of the new conservative vanguard. "It comes down to basic principles -- who's better at preserving jobs, small business or the government? If you think it's small business, look to the Republicans." Curly Haugland, a Republican National Committee member from North Dakota, said there is little need for ideas when the main task for the GOP will be fighting back Democratic ones. "We're going to have plenty to do just playing defense," he said. "These people [the Democrats] are going to be aggressively on the march." Others argue that the past two elections represented a more fundamental turn against Reaganite assumptions that dominated for nearly three decades, and that the party has to develop an agenda that goes beyond tax-cutting to lay out a vision for government that, while smaller than what Democrats want, is active in its own right.

"They're talking too much about opposing," Florida GOP Chairman Jim Greer said of the House Republicans. "They're talking too much about voting 'no' and not about how they're going to solve these issues. I'm proud the party took a stand on principles, but I also want to hear about how the Republican Party leaders intend to solve problems." Mitt Romney, the former Massachusetts governor and presidential candidate, praised House leaders at their recent retreat in Hot Springs, Va., for their opposition to the stimulus, but he also urged them to present a health-care plan before the Democrats did.

The need to move forward was an argument for selecting Michael S. Steele as Republican National Committee chairman. The former Maryland lieutenant governor has good relations with more moderate members of the party, hails from the suburbs in a blue state, and puts a more diverse face on a party that has not had a single African American governor or member of Congress in six years, and is also lagging badly with Hispanic voters. In his initial statements as party leader, however, Steele has stuck to tried-and-true themes, including invoking the GOP's 1994 victory as a model and praising House leaders for their stimulus vote. "The goose egg that you laid on the president's desk was just beautiful," he told them. "You and I know that in the history of mankind and womankind, government -- federal, state or local -- has never created one job. It's destroyed a lot of them."

Steele is also facing a distraction -- a federal inquiry into allegations that his 2006 Senate campaign paid a defunct company run by his sister for services that were never performed. The campaign's finance chairman made the allegations to federal prosecutors last year as he sought leniency during plea negotiations on unrelated fraud charges. For now, the big question facing the Republican Party is how voters will perceive its stand against the stimulus package, a judgment that is likely to depend on how the package is perceived months from now. Republicans dismiss any worry that, in their rejection, they will be seen by voters as indirectly running against an economic recovery. Given how small their numbers are, they noted, it will be difficult for them to actually block the bill. And their own constituents, they said, are becoming increasingly critical of the package. "This thing is a dog and it doesn't hunt," Ryan said. "Everyone thinks Washington is just going back to pork-barrel spending. You can't walk down the street in Janesville, Wisconsin, without someone trashing it."

When it comes to the U.S. job market, there are few places to turn. Every U.S. state and 95% of the nation's metropolitan areas will end 2009 with fewer jobs than they started with, while only two sectors — education and health services, and government — will add workers. That's the grim prediction from economic consulting firm Moody's Economy.com that illustrates how the recession is touching Americans in every corner of the country. And it means that, unlike in prior downturns, most people who lose their jobs can't simply pick up and move to find work, an issue compounded by the housing crisis. Such an unprecedented lack of mobility will make the downturn longer and deeper, economists at Moody's Economy.com, Wachovia and others say. "There really is nowhere to hide in this economy," Moody's Economy.com chief economist Mark Zandi says.

"If you lose your job, it's not clear where you should move to find one or even what training or education you need to retool yourself," he says. "The hallmark of the current downturn is that it is so broad-based across industries, occupations and regions of this economy." Workers in some states certainly will be better off than others. Employers in six states — Washington, Texas, North Dakota, Colorado, New Mexico and Nebraska — and Washington, D.C., are expected to shed less than 1% of their workers this year. At the same time, Ohio, Missouri, Florida, Connecticut, Hawaii and Michigan are forecast to lose the greatest proportions of their states' jobs. Michigan, hit hard by a rapid decline in the U.S. automotive industry, is expected to shed more than 175,000 jobs this year, a 4.3% decline, according to Moody's Economy.com. Nationwide, employers are expected to cut 2.7 million jobs this year after eliminating more than 2 million positions in 2008, according to Moody's Economy.com.

The year is off to a bad start. Firms cut 598,000 jobs in January, the most since 1974, the Labor Department said Friday. The unemployment rate rose to 7.6%, the highest in more than 16 years. More than 11.6 million people were unemployed last month, up 54% from a year earlier and the most since December 1982. Including people who were working part time even though they wanted full-time work, and those who had given up on finding a job, the rate of "underemployment" was 13.9% in January, up from 9% a year earlier and the highest since the Labor Department began tracking the number in 1994. This month isn't looking much better. Already, household names such as Macy's, Electronic Arts and PNC Financial Services have announced thousands more layoffs.

Graphic designer Fred Jung, 35, was laid off on Jan. 22 from his job in the marketing department at New York Life Investment Management. He was given severance pay, which is helping to supplement his wife's salary as a labor-and-delivery nurse. But Jung, a father of a 2-year-old girl and a 4-year-old boy with autism, says he sees little hope in this job market, much less than when he was laid off during the 2001 recession. When he lost his job then, Jung was able to piece together freelance assignments and moved from the Philadelphia area to northern New Jersey, where he saw better job opportunities. He got permanent work with New York Life in 2003. "I'm very scared, a little depressed. Worried a lot," says Jung of Fort Lee, N.J., who also notes that in 2001 he wasn't a father, which means added pressure. "I don't know where I am going to find a job. And I really need one." On the other side of the country, Dave Sitton of Tucson is digesting his recent layoff.

On Jan. 20, he was laid off from radio company Clear Channel, where he was the vice president for southern Arizona in the outdoor division. He went to work that day prepared to lay off some of the employees he oversaw. Instead, his boss told him his job had been eliminated. Sitton, 54, had been with the company for 8? years. "I was speechless. I just sat there with my mouth agape," says Sitton, who has two daughters, one who is a sophomore in college and another who is a junior in high school, preparing for college. "I've not (formally) applied for a job since I was 19 years old. I've always gone on to the next one, so it's going to be an interesting experience." The ability to move to a place where there are better opportunities is important to the health of the U.S. economy and has long made downturns in the USA shorter and shallower than those in other parts of the world, Zandi says. If people can move to find work, they can get back on their feet and spend money more quickly, helping to lift the economy sooner than if they had not moved.

In Europe, for example, people are far less likely to be willing to move, providing less flexibility in the labor market. "The ability of people to relocate throughout the country has been one of the United States' greatest competitive advantages. It's a thing unique to our economy," says Mark Vitner, senior economist at Wachovia Securities in Charlotte. Not only is it tough to find jobs elsewhere this time around, but with the housing market in a deep slump, people who could find a job elsewhere are stuck. "That really hurts people's ability to be mobile because they can't sell," says Donald Grimes, senior research associate at the University of Michigan who studies labor trends. Photographer Meg McKinney, 54, of Birmingham, Ala., says she has moved in the past to boost her career. But after being laid off from Southern Living in November after 14 years at the magazine, McKinney is not sure it will be possible to relocate, because she owns a home and has a mortgage.

"It's tough," she says. "You don't understand why your world is taken away from you and what it is going to be replaced by. What kind of standard of living will I have in the future? Big worries. I try not to think about them too long." Software engineer Adam Risoldi, 25, has had several job leads outside of his home base of Phoenix since he was notified by IBM on Jan. 27 — the day after he received a positive performance review — that Feb. 26 will be his last day at the company. He owns a home and pays $2,750 a month on his mortgage. He's considering moving in with his parents in New Jersey if he can find a job there. That would allow him to continue paying his mortgage while his house is up for sale in one of the worst markets in the nation. "I was originally planning to move back to the East Coast" anyway, Risoldi says. "But," he says, "I wanted to do it on my own terms."

Conference Board chief economist Bart van Ark attributes the uniformity of the downturn to the financial industry's crisis, which has led to tighter or more expensive credit for businesses and consumers no matter where they are located. Without access to affordable credit, businesses and consumers can't finance investments, inventories and other spending. That has led to a sharp deterioration in the economy from coast to coast. The New York-based Conference Board's measurements of consumer confidence are down sharply in all regions of the nation compared with a year ago. "There is really no positive news pretty much to be found anywhere," van Ark says. Consumer confidence is directly linked to the job market. Even if they have a job, if people are worried they may lose it or at least some of their income, their confidence wanes and their desire to spend money drops. Consumer spending accounts for more than two-thirds of U.S. economic activity, so if consumers cut back, the economy slows more, threatening even more jobs.

In a USA TODAY/Gallup Poll of 1,027 adults conducted Jan. 30-Feb. 1, 38% said they had cut back on spending "a lot" in the last six months because they were concerned about their income; an additional 36% said they had cut back "a little." About 41% said they had lost a job or had a close friend or relative who had lost a job in the last six months — meaning that for many people, the labor market's deterioration is more than just a newspaper headline. The lack of confidence among consumers is having a ripple effect throughout the economy, notes Federal Reserve Bank of Dallas President Richard Fisher. And it's not just consumers. He says business owners are cutting workers because of what he sees as a "paucity of confidence." "I'm seeing businesses make decisions that may well prolong this downturn," he says, noting that Texas had one of the nation's best-performing economies in 2008 but sank into recession at the end of the year with the rest of the country.

Employers across the country are expected to begin adding jobs in 2010, but it won't be until late 2011 that the number of jobs is equal to the levels that existed when the recession began at the end of 2007, Moody's Economy.com predicts. That is assuming Congress enacts a fiscal stimulus plan in the neighborhood of $825 billion and an expansion of the financial system's bailout, including a program to prevent home foreclosures. Other analyses are gloomier. Another consulting firm, IHS Global Insight, thinks that the prerecession peak of jobs won't be reached until the third quarter of 2012. Some parts of the country will see a turnaround sooner than others, analysts say. Employers in the District of Columbia and in 10 states, mostly in the South and West, are expected to begin adding jobs at the end of 2009, according to Moody's Economy.com. The rest won't see gains until the first half of 2010, with two states — Wisconsin and Iowa — continuing to shed jobs until the second half of next year.

Once the economy does improve, key demographic trends that were in motion before the recession began in December 2007 are expected to resume. Most notably, the Sun Belt is expected to be a key source of new jobs as Baby Boomers continue their migration to the area for retirement, according to Moody's Economy.com. Their demand for services, such as health care and leisure activities, will create jobs and have a ripple effect through the region's economy. Nevada, New Mexico and Texas are expected to have the strongest job growth from the end of 2008 until the end of 2012, when President Obama will be up for re-election. Overall, U.S. employers are expected to boost jobs by an average of 1.3% each year during that time, according to Moody's Economy.com. Steve Addington, 59, moved last month from Muncie, Ind., to Avondale, Ariz., where he and his wife, Janet, bought a retirement home four years ago. He was laid off Oct. 28 from his job as a general manager of a car dealership. Figuring he had a better chance of finding a job in Arizona than in Indiana, he moved.

He started a job in January selling cars, which has meant about a 50% pay cut from his former job. His wife, a teacher, is staying behind in Indiana for the rest of the school year. After that, they will reassess where they should live. Addington says he's been on an "emotional roller coaster" since losing his job. "The rug's been pulled out from under me," he says, while noting he is better off than a lot of people. "I am not starving to death. I had some money set aside, but it only lasts for so long. You just have to pull yourself up and try again."

Arnold Schwarzenegger has never been one for introspection but even the irrepressible Governor of California must be slightly regretting his decision in 2004 to disparage economic doomsayers as "girly men". With America's most populous state mired in the worst budget crisis in its history, brought down by a combination of rising unemployment, plummeting house prices, troubled financial markets and the peculiarities of its own legislature, it appears that the economic girly men were right to be worried. This weekend the Governor and Californian lawmakers were locked in negotiations, desperately trying to agree a budget that will cover a $42billion (£28.4billion) deficit in the state's finances over the next 18 months.

The weekend's discussions were the culmination of four months of arguments over the combination of tax increases and spending cuts that must be made to balance the books. Democrat members of the legislature have resolutely opposed cuts to social services, while Republicans have fought increased taxes and the former Terminator, without a sufficient majority to push a budget through, has been unable to broker an agreement. Stephen Levy, chief economist at the Center for Continuing Study of the California Economy, held out little hope of a breakthrough. "They've been close to a deal for weeks so no one's holding their breath," Mr Levy said. "It's embarrassing."

Without a truce, the state will go bust this month. John Chiang, the state's controller, said that California had been borrowing from internal reserves and Wall Street to pay its bills but that its avenues for loans had been exhausted. The credit crisis means that banks have little taste for lending to a financially imperiled state. Unless a budget can be passed, this month there will be a $346million shortfall between the money the state has and the funds needed to pay for services and operations. In an attempt to stave off a crisis, California has implemented some dramatic initiatives to conserve cash. Last Friday more than 200,000 state employees started taking monthly unpaid, two-day holidays that Mr Schwarzenegger hopes will save $1.4billion by June 2010.

The centre of Sacramento, the state capital, was nearly deserted on Friday as workers from agencies, including healthcare services, stayed at home. Matthew Mahood, president and chief executive of the Sacramento Metro Chamber, said: "The lack of a state budget is placing local businesses and the jobs they create at risk."It has also cut funding for more than 5,000 construction projects. Struggling Californians also cannot rely on tax refunds to help to make ends meet. Refunds will be at least 30 days late this month because the state needs the money for more vital services. This was part of a plan by Mr Chiang to save $3.5billion over seven months by holding back payments for various social services, including those that cover food stamps and rent assistance for the poor.

Bill Lockyer, California's treasurer, admitted on Friday that the state's finances were "disgraceful". But he insisted that bondholders need not worry because they, alongside state schools, were the first in line to be paid under the Californian constitution. Such assurances did not stop Standard & Poor's (S&P) from lowering California's rating last week from A+ to A, the lowest credit rating of any US state. Gabriel Petek, an S&P credit analyst, said long-term hope lays in the possibility that California would receive as much as $30 billion as part of President Obama's stimulus package. California has been hit hard by the recession. Unemployment stood at 9.3 per cent in December, the most recent monthly figure available from the Bureau of Labor Statistics, compared with the national average of 7.2 per cent. This is partly because California attracts large numbers of immigrants.

Personal income tax provides more than half of the revenue that California needs to pay for services, but fortunes of the multi-millionaires of Hollywood and Silicon Valley have been eroded by falling markets. "California collects a disproportionate amount of that income from wealthy taxpayers so when wealthy people are suffering investment losses as they are now, revenues drop dramatically," said Douglas Offerman, senior director of Fitch Ratings. California's property boom also outstripped those in other states and it has suffered some of the worst price falls in the country. Some of California's problems, however, are more closely related to its expowered citizens than the recession. Californians can originate and vote on proposals, a democratic right that has, over time, restricted lawmakers' ability to juggle the state's budget. To pass a budget, the legislature must have a two thirds majority, which gives significant power to minority parties with little interest in political harmony.

General Motors Corp. and Chrysler LLC may have to be forced into bankruptcy by the U.S. government to assure repayment of $17.4 billion in federal bailout loans, a course of action the automakers claim would destroy them. U.S. taxpayers currently take a backseat to prior creditors, including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to loan agreements posted on the U.S. Treasury’s Web site. The government has hired a law firm to help establish its place at the front of the line for repayment, two people involved in the work said last week. If federal officials fail to get a consensual agreement to change their place in line for repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid.

The government would finance the bankruptcy with a so-called "debtor in possession" or DIP loan, a lender status that gives the U.S. priority over other creditors, said Don Workman, a partner at Baker & Hostetler LLP. "They are negotiating to see if they can reach an agreement," said Workman, a bankruptcy lawyer based in Washington. "If not, they are saying ‘We are pretty darn sure that a bankruptcy judge will allow us’" to be first in line for repayment. GM shares traded in Germany rose 2.5 percent to the equivalent of $2.91 as of 12:07 p.m. in Frankfurt. Ford Motor Co., the second-largest U.S. carmaker, advanced 0.5 percent to $1.95. Ford has declined government bailout funds so far.

GM and Chrysler have dismissed calls to reorganize under bankruptcy protection, saying a Chapter 11 restructuring would scare away buyers and lead to liquidation. GM and Chrysler are working toward a Feb. 17 deadline to show progress on a plan put in place as part of the U.S. loans received in December from the Troubled Asset Relief Program. They must reduce labor costs and show how they will repay the money by next month. GM and Chrysler are already trying to restructure out of court, cutting labor costs, reducing debt levels and eliminating dealers. GM is in talks to pare $27.5 billion in unsecured debt to about $9.2 billion in a swap for equity. The company said it plans to shut dealers and reduce obligations to a union retiree health fund by half to $10.2 billion in a separate equity swap. Chrysler Chief Executive Officer Robert Nardelli has said his company will also try to cut debt levels.

GM said today it’s in talks to take back parts of Delphi Corp., a parts supplier the automaker separated from a decade ago, in order to maintain portions of the supply chain. The automaker is also considering additional plant closures, job eliminations and pay cuts for administrative workers, a GM official said. The automaker probably will close at least two factories and Chrysler will temporarily shut three, the Wall Street Journal reported, citing people familiar with the matter. The General Motors closures may include a truck plant in Pontiac, Michigan, and the Chrysler shutdowns will be in Michigan and Canada, the newspaper said. January sales from automakers plunged 55 percent at Chrysler, 49 percent at GM and 40 percent at Ford.

The government has the option of working out an intercreditor agreement outside of bankruptcy that would give it rights to some collateral ahead of other creditors. Such agreements, often made when money is lent to a company that already has liens on most of its assets, are usually negotiated when the loan is made. U.S. Law Firm Cadwalader, Wickersham & Taft LLP is advising the government on how to make sure it gets paid back first, including by way of intercreditor agreements, the people involved with the talks said. The law firm, hired last month, is working for the government with Sonnenschein, Nath & Rosenthal, a Chicago-based firm with capital-markets experience, and Rothschild Inc., an investment bank, the people said.

The issues are "extremely complex," said Bruce Clark, a credit analyst at Moody’s Investors Service. The existing loan agreements appear to give the banks a superior position to the government, Clark said. "The ultimate position of the government could end up being determined by whatever concessions various creditors make, and the determination of a bankruptcy court if it ever gets there," he said. When the automakers were lobbying the government for assistance, lawmakers made a point of saying that the government must be assured that if the companies failed, taxpayers wouldn’t lose the investment. Workman said the U.S. couldn’t force its loans to supersede existing secured lenders, so it built in a measure that allowed the debt to be converted to debtor-in-possession financing. "A carrot and stick approach is spot on," he said. As it stands, the government loans fall below existing debt secured by most assets for Auburn Hills, Michigan-based Chrysler and Detroit-based GM. Prior lenders have first position on some assets. The government has first position on assets not already pledged.

Chrysler has $7 billion in loans from a group of banks, including New York-based JPMorgan, Goldman Sachs and Citigroup. It also has $2 billion in loans from owners Cerberus Capital Management LP and Daimler AG. Cerberus owns 80.1 percent of Chrysler. Daimler owns the remainder. GM has $6 billion in loans secured by assets from lenders including JPMorgan and Citigroup. JPMorgan spokesman Brian Marchiony, Goldman Sachs spokesman Michael Duvally and Citigroup spokeswoman Danielle Romero-Absilos declined to comment. Lori McTavish, a spokeswoman for Chrysler, declined to comment beyond confirming the primacy of the bank loans. GM spokeswoman Renee Rashid-Merem and Treasury spokesman Isaac Baker declined to comment. Unless the automakers show by March 31 that they will be able to return to profit and repay the money, the government can demand return of the loans.

Nissan Motor on Monday joined its Japanese carmaking rivals in forecasting a big loss for the current financial year, and said it would eliminate 20,000 jobs, in one of the most aggressive cuts announced by any Japanese company since the start of the global downturn. The development reflects the growing urgency felt by Japanese manufacturers across the board as it becomes clear that the slowdown, combined with the persistent strength of the yen, is hitting more severely than thought. "In every planning scenario we built, our worst assumptions on the state of the global economy have been met or exceeded, with the continuing grip on credit and declining consumer confidence being the most damaging factors," the Nissan chief executive, Carlos Ghosn, said in a statement accompanying Nissan's earnings release for the three months ended Dec. 31.

This will be the first annual net loss since Ghosn took the helm at Nissan a decade ago. The entire industry is in turmoil. Toyota Motor, Mazda Motor and Mitsubishi Motors all recently announced they would post losses. In the United States, the government is bailing out two of the country's largest automakers, General Motors and Chrysler. "In 1999, we were alone. In 2009, everybody is suffering," Ghosn said Monday, according to The Associated Press. Nissan said it now expected a net loss of ¥265 billion, or $2.91 billion, for the business year ending March 31. It had previously projected a ¥160 billion profit for the year. The profit warning coincided with data released Monday showing that corporate bankruptcies in Japan rose 16 percent in January to the highest level in six years. Also, Japanese machinery orders declined for a third consecutive month in December.

"There has been a phenomenal decline in output in Japan, and it looks like the first quarter of this year will be even worse than the last quarter of 2008," said Hiroshi Shiraishi, an economist in Tokyo for BNP Paribas. "Demand for capital goods remains in free fall." Company financial releases over the past two weeks have shown that the drop-off in demand was much worse than feared, leading nearly all of the best-known Japanese companies - Toyota, Sony, NEC, Hitachi and Panasonic among them - to warn of major losses for the business year ending March 31 and begin a wave of layoffs in an attempt to preserve cash. Honda Motor and Nintendo, the maker of the popular Wii game console, are among the few major companies to still expect a full-year profit, but they, too, have had to severely scale back their earnings expectations.

Nissan revised its forecast after a grim set of earnings for the last three months of 2008, as the economic slowdown and credit crunch caused its global car sales to slump 18.6 percent, to 731,000 units. Nissan lost ¥83.2 billion during the October through December quarter - a major reversal from the net profit of ¥132.3 billion a year earlier. With cars piling up unsold around the world, manufacturers have rushed to cut production and costs. Nissan on Monday announced that it would reduce output to 787,000 units by March 31 - down 20 percent from its original production plan. It is also reducing capital spending, scrapping bonuses for directors and shedding 20,000 of its 235,000 staff; 12,000 of the job cuts will be in Japan.

Nissan's layoffs are the third announcement of this magnitude in Japan in less than two weeks: Since Jan. 30 alone, the electronics makers NEC and Panasonic have announced layoffs totaling 35,000. The downturn in demand for discretionary goods like cars has hurt manufacturers around the world. France was set to announce a plan Monday to support its car industry ahead of expected weak results from PSA Peugeot-Citroën and Renault, which owns a 44 percent stake in Nissan.

The global financial crisis is forcing the world’s central bankers to surrender some of their prized independence. Regaining it won’t be easy. More than a principle is at stake. For longer than a quarter-century, independent central banks have been able to take painful and politically unpopular measures needed to restrain inflation. But the worst economic calamity since the 1930s has left Ben S. Bernanke, Mervyn King, Masaaki Shirakawa and their colleagues little choice but to align their institutions’ policies with those of their nations’ elected leaders.

As a result, policy makers may find it harder to act whenever the time finally comes to begin soaking up the money with which they’ve flooded the globe. "The lines between central banks and governments are becoming fuzzier," says Nouriel Roubini, a New York University economist. "Inflation is the path of least resistance for politicians, but it is dangerous." Finance ministers and central bankers from the Group of Seven nations will discuss what more they can do together when they meet Feb. 14 in Rome. What’s brought them to this point is the collapse of credit markets, which has robbed traditional monetary policy of much of its punch.

The U.S. risks a deflationary economic decline -- in which output, prices and wages all fall -- even after repeated interest-rate cuts that have driven the overnight bank lending rate close to zero. In response, Federal Reserve Chairman Bernanke has joined with the U.S. Treasury in unprecedented steps to revive credit. Meanwhile, King and Shirakawa, his British and Japanese counterparts, are set to start on the same course after seeking a go-ahead from their governments to buy up private-sector securities. "Monetary authorities and the fiscal authorities are working hand-in-glove," Canadian Finance Minister Jim Flaherty said in an interview.

While that may be necessary now, it could turn into a problem later. Some Fed policy makers have already stressed the need to move quickly, once the crisis passes, to sop up all the money they have pumped into the financial system. Critics charge that the Fed and other central banks laid the groundwork for the current turmoil by not raising rates fast enough once the 2001 recession passed. "The importance of doing this correctly cannot be overemphasized," Federal Reserve Bank of Kansas City President Thomas Hoenig said in a Jan. 7 speech. "We have sometimes been slow to remove our accommodative policy, and in doing so, we have invited the next round of inflation, excess and crisis."

Treasury Secretary Timothy Geithner has voiced the opposite concern, noting that Japan in the 1990s and the U.S. in the 1930s snuffed out incipient recoveries by prematurely tightening credit. He has vowed not to repeat that mistake. His views carry considerable weight at the Fed. Not only is he a former New York Fed Bank president, but the Treasury is providing seed capital for many of the credit facilities the central bank will ultimately have to unwind -- including $20 billion to cover any initial losses on the Fed’s planned $200 billion program to promote loans to students, small businesses and auto buyers.

"If you have Treasury taking the first loss, you may feel some responsibility to take their advice," says Vincent Reinhart, the Fed’s former director of monetary affairs and now a resident scholar at the American Enterprise Institute in Washington. What’s more, the Treasury may end up playing a greater role in helping the Fed soak up the hundreds of billions of dollars of liquidity it has pushed into the financial system. That’s because of changes in the size and makeup of the Fed’s balance sheet.

In the past, the Fed has withdrawn money from the market by selling Treasury debt it holds to private investors. Those holdings have now dwindled, even as the balance sheet has ballooned, because the central bank has been swapping its Treasuries for riskier, harder-to-sell assets in an effort to revive the credit markets. That means the Fed may need to rely on the Treasury to sell bills on its behalf when it wants to withdraw money from the economy. The Fed’s flexibility "could be blocked by a Treasury decision," Reinhart says.

Bernanke plays down the difficulty. "A significant shrinking of the balance sheet can be accomplished relatively quickly," he said in a Jan. 13 speech, in part because many assets the Fed holds are short-term and thus can be retired routinely as they come due. Some of Bernanke’s colleagues fret that the Fed has also opened itself up to political interference by allocating credit to certain sectors of the economy according to the types of securities it purchases. Stanford University Professor John Taylor dubs that strategy "mondustrial" policy -- a hybrid of monetary and industrial policy.

In response to comments Taylor made during a Jan. 3 panel discussion in San Francisco, Federal Reserve Bank of St. Louis President James Bullard said he’s "very concerned" about maintaining independence. The Fed isn’t alone in radically remaking the way it does business. With its benchmark rate now at a record low of 1 percent, the Bank of England is undergoing the biggest changes to its monetary-policy framework since it won control over interest rates in 1997.

The British government last month granted King, the bank’s governor, authority to spend 50 billion pounds ($73 billion) on bonds and commercial paper as a way of unfreezing markets. The Debt Management Office will sell Treasury bills to pay for the purchases. To use the fund for stimulating the economy by boosting the money supply, the central bank will first need permission from Chancellor of the Exchequer Alistair Darling. "This is something that could only be done with the Treasury and the Bank of England working hand in hand," Darling said last month.

Thomas Mayer, chief European economist at Deutsche Bank AG, says the Bank of England may struggle more than the Fed to reassert itself, given that it has been independent for only 12 years. In Japan, central-bank governor Shirakawa cut interest rates in December after the government lobbied the Bank of Japan to spur economic growth. He has now asked the government for approval to buy up to 1 trillion yen ($11 billion) of shares owned by financial institutions. Still, he has criticized a push by some lawmakers for the government to begin printing money.

The European Central Bank under President Jean-Claude Trichet has been more reluctant to tie its policies to those of national governments -- in part because there are 16 of them in the euro region, from Germany to Malta. Trichet is already playing down the likelihood that his bank will cut rates to zero and has refused to give odds on whether it will need to buy securities. ECB Executive Board member Jose Manuel Gonzalez-Paramo cited one reason for the central bank’s reticence in a Feb. 6 speech. Direct purchases of securities might compromise a central bank’s independence by exposing the bank to credit risk, he said in Granada, Spain. That could force policy makers to turn to their governments for more capital, he said.

Rather than take that risk, central bankers would be likely to "exhaust all other options" in order "to preserve price stability," he said. Another reason for the ECB’s reluctance: the risk of political flak if the central bank’s purchases were perceived to favor one nation’s economy over another’s. "Any debt-purchase program implemented by the ECB involves risk-sharing between members, and that’s highly political," says Jacques Cailloux, chief Euro-area economist at Royal Bank of Scotland Group Plc. Still, Erik Nielsen, chief European economist at Goldman Sachs Group Inc. in London, says the ECB will be forced to start buying commercial paper within months to combat the financial crisis. "The deflationary environment is closing off options for central banks to act independently," says Stephen Roach, chairman of Morgan Stanley Asia and a former Fed economist. "It’s very worrisome."

Bank of Canada Governor Mark Carney, who predicted last month the world’s eighth-largest economy will recover quickly from its current recession, will face skeptical legislators when he testifies before a parliamentary committee tomorrow. Lawmakers will ask Carney and Senior Deputy Governor Paul Jenkins to explain why they expect 3.8 percent growth in 2010, more than twice the pace predicted by the International Monetary Fund and more than a percentage point above the average forecast of economists surveyed by the government. "His prediction seems extremely optimistic and is out of line with other predictions that are being made," Thomas Mulcair, the New Democratic Party’s finance spokesman, said in an interview. "If he’s got some information that nobody else has, maybe he’s going to have to share his recipe with us."

Opposition parties are saying the recession is already proving worse than expected and want the governing Conservative Party to add to the stimulus package in its Jan. 27 budget. The central bank’s projection, released on Jan. 23, was followed by statistics showing that gross domestic product contracted by a worse-than-expected 0.7 percent in November, as well as a record number of job losses and the lowest level of housing starts since 2001 in January. Carney and Jenkins are scheduled to appear at 9 a.m. New York time. "We’re going to ask him where he gets his numbers, because he’s about the only one to predict a rebound of that magnitude," said Pierre Paquette, a former finance spokesman for the Bloc Quebecois who manages the party’s daily business in Parliament. "I wouldn’t want the government to rely on those figures to avoid its responsibilities."

The NDP’s Mulcair said the "assumptions" behind Carney’s forecast may be suspect and, "in that case, some of the steps that he’s taking" may be inadequate to jolt the economy. Liberal Party finance critic John McCallum also said he would ask about the forecast. McCallum, former chief economist with Royal Bank of Canada, said Carney was an "outlier" relative to other economists. Still, it’s unlikely Carney and Jenkins will repudiate their forecast so soon after making it, said Benoit Durocher, an economist with Mouvement Desjardins in Montreal. Policy makers "will go to bat with the current forecast, but they may add some nuances," Durocher said. "They had mentioned balanced risks, but it’s pretty clear the risks are now to the downside. For the figure itself, they don’t typically change their forecasts between official releases."

Canadian housing starts fell to the lowest since 2001 as work on urban single-family dwellings plunged to the lowest level since 1996. New home starts fell 11 percent in January to 153,500 units on an annualized basis, the fifth straight decline, Canada Mortgage and Housing Corp. said today from Ottawa. Economists anticipated the pace would slow to 165,000 units, according the median of 20 responses in a Bloomberg survey. "Canada’s homebuilders are aggressively pulling in their horns on worries of a supply glut in a deteriorating economy," Derek Holt, an economist at Scotia Capital in Toronto, wrote in a note to clients.

Potential buyers of new homes are being discouraged by job losses in the country’s first recession since 1992, which has also triggered a rising stock of existing homes that they can buy instead. Employers cut a record 129,000 workers in January, Statistics Canada reported Feb. 6. Work on new single-family homes in cities fell 20 percent to 50,000 units, the lowest since February 1996. Multiple-unit projects such as condominiums fell 12 percent to 76,700. New home construction declined in all five regions of the country in January, led by 30 percent drops in British Columbia and the western prairie provinces, the report said.

"Reduced sales and increased listings in the existing home market have led to reduced spillover demand in the new home market," Bob Dugan, Canada Mortgage and Housing’s chief economist, said in the report. Existing home sales will fall 17 percent this year, the Canadian Real Estate Association said in a separate report today, blaming waning consumer confidence. Bankruptcies jumped 47 percent in December from a year earlier as more consumers struggled to pay their bills, the country’s bankruptcy superintendent reported on its Web site.

The single European banking system which enabled foreign banks such as those from Iceland to offer British customers savings accounts is "not tenable" in its current form, the chairman of the Financial Services Authority has said. Lord Turner said that Britons must now decide between more national powers and less direct integration or the creation of a pan-European regulation system to cover banks throughout Europe. The comments will be seen as a major challenge to the British model of financial services which for decades has relied on the notion that banks should be able to practice and offer services to UK customers no matter where they are located.

The FSA’s Financial Risks Outlook - an annual survey of the economic and financial landscape, referred to the collapse of a number of Icelandic banks, many of which had UK savers, and their subsequent refusal to protect foreign customers’ funds, saying: "The Icelandic bank case suggests that present European rules which allow banks to raise retail deposits in another member state on a passported branch basis are untenable and that either more national powers over local operations or more European-wide approaches are required." Lord Turner added: "This is a definite issue for the UK in particular because the dominant philosophy has been for a European single market but we need elements such as a pan-European system of deposit insurance if it is to function. We have to face the fact that either we are going to need less Europe or more pan-European regulation. This is a debate we need to have."

The report also said that the FSA and the Treasury had now agreed on the need to devise new capital adequacy rules for British banks, acknowledging that the current system of Basel rules had been pro-cyclical - in other words accentuating both the booms and busts in the financial cycle. Setting out a whole spectrum of risks facing the financial system, the FSA also raised the prospect of the UK facing stagflation in the coming years. Although most economists are currently focused on the risk of a deflationary spiral emerging, as it did in the 1930s, the FSA said a stagflationary scenario, in which sliding growth comes alongside high and sticky inflation, was a possibility. Lord Turner said this was a particular risk if the pound fell even further to new lows.

Lord Turner also warned that the fall in house prices in recent months had shown itself to be even more severe than in any recent property slump, including the one in the early 1970s. He warned that the slide could worsen in the coming months, saying: "The boom in house prices went on further than in previous cycles and the greater role of buy-to-let has produced a segment of the market which may react in a fashion more typical of commercial property, which tends to fall faster in a recession." The report warned that the UK faces a risk of a deeper-than-expected recession due to a vicious cycle, or negative feedback loop, which has developed between falls in house prices, drops in consumer spending and plunging business investment. The FSA said: "These self-reinforcing cycles exist in any economic downturn, but the crucial danger in the current crisis is that weakness in the banking system could stimulate and reinforce them."

The recession is likely to be deeper and more prolonged than previously expected with a continuing lack of bank credit exacerbating house price falls and consumer spending, the City watchdog warned. The Financial Services Authority (FSA) said that predictions of the UK economy contracting by 2.2 per cent this year before returning to growth in 2010 could prove optimistic. In a report outlining the main risks facing the financial system, the FSA said that a continuing dearth of bank credit may prompt businesses and consumers to hunker down for longer than in previous recessions.

"The risks are weighted to the downside and, while the effects of fiscal stimulus and monetary easing remain unclear the recessions may be deeper and more prolonged than expected," it said. "These self-reinforcing cycles exist in any economic downturn but the crucial danger in the current crisis is that weakness in the banking system could stimulate and reinforce them." The report is the latest to underline the severity of the downturn in Britain. Last week the National Institute of Economic and Social Research, the country's leading economics research body, also warned on Britain's worsening prospects.

It said that the sharpest plunge in consumer spending since the Second World War would drive Britain into its deepest economic slump for 60 years. The FSA study will give further ammunition to business leaders who have accused Gordon Brown of not doing enough to ease the crisis. Last month John Cridland, the deputy director-general of the CBI, said it was essential that credit flowed through the economy again or else good businesses would fail, causing more job losses and lasting damage to the economy. The Government forecast a decline of between 0.75 per cent and 1.25 per cent in output this year.

Fears mounted that 38,000 small businesses could fold this year after government data showed a sharp rise in corporate insolvencies. The Insolvency Service revealed that corporate insolvencies jumped by more than 69pc in the final quarter of last year – the worse increase in 15 years as recession tightened its grip on the British economy. It showed that the total number of company insolvencies reached 21,082, meaning one in every 150 companies went bust in 2008. The dramatic increase includes iconic brands such as Woolworths and comes just as a courts appoint administrators to BG Holdings, the parent company of Baugur's stakes in House of Fraser, Mappin & Webb, supermarket chain Iceland and Hamley's.

However, rescue, recovery and restructuring specialist Begbies Traynor predicted that this could be just the tip of the iceberg. It said the number of business failures to come this year is set to surpass the peak of the early 1990s recession, and could reach 38,000 businesses. Ric Traynor, chairman of Begbies Traynor, said: "We have to be prepared for tough times over next two years with the number of business insolvencies increasing sharply."

His fears were echoed by other practitioners. New research from business insurance comparator simplybusiness.co.uk predicted nearly a quarter of a million of Britain's smallest businesses are at risk of failure, placing over 475,000 jobs in jeopardy. Ian McCafferty, chief economic advisor of the CBI, said: "These figures are not surprising given the very difficult conditions companies are currently finding themselves in; squeezed by both the sharp contraction in economic activity and their increasing difficulties accessing finance."

Switzerland's two largest banks are set to announce this week that they suffered combined losses last year of 29 billion Swiss francs ($25 billion), according to a Swiss news report Sunday. UBS AG will reveal Tuesday an annual net loss of 21 billion Swiss francs and will announce 5000 to 8000 new job cuts, adding to 9,000 positions already eliminated, the German-language newspaper NZZ am Sonntag reported. Rival bank Credit Suisse Group will announce its own loss of 8 billion Swiss francs, but no additional job cuts are expected, the report said.

In a similar approach to the U.S. bank bailout program, the Swiss government provided a 6 billion franc capital injection into UBS, along with additional new capital as part of a plan to transfer some of the bank's illiquid assets into a new fund. The Swiss financial institutions are struggling with illiquid mortgage securities, the same financial instruments that plague banks in the U.S. and elsewhere in Europe. These mortgage assets, which spread around the globe, are considered to be at the center of the financial crisis.

France on Monday pledged 3 billion euro (2.6 billion pounds) loans for struggling car makers PSA Peugeot Citroen and Renault, and said the two companies had promised to safeguard French jobs in return. Some of France's EU partners have already protested over efforts by President Nicolas Sarkozy to protect French factories from the impact of the economic crisis and the European Commission said it would scrutinise his auto plan. Sarkozy offered France's two carmakers a total 6 billion euros in 5-year, 6 percent interest rate loans and said they had pledged not to close any French sites during the loan term and had agreed to "do everything" to avoid further job losses.

PSA Chief Executive Christian Streiff and Renault Chief Operating Officer Patrick Pelata said their firms would not launch job cut plans this year.Industry secretary Luc Chatel told reporters the terms of the aid for the sector foresaw management foregoing bonuses. Asked whether dividends would be paid to shareholders, he said the priority would be investment. Falling car sales worldwide have hurt the French car industry as the credit crunch and worsening economic climate put the brakes on consumer spending. Underlining the problems facing the sector, Renault's alliance partner Nissan announced on Monday 20,000 job cuts by March 2010 and said it expected to report its first annual loss for 14 years.

French officials say the car industry accounts directly or indirectly for 10 percent of all jobs in France and in an effort to spread out the help, Sarkozy said the support fund for auto suppliers would be doubled to 600 million euros. Sarkozy angered Prague last week by saying French car companies should locate their factories at home rather than in cheaper labour markets, like the Czech Republic. Within minutes of the French plan being unveiled, the European Commission in Brussels said it would be reading the small print to make sure it did not break competition rules. "The Commission will need to scrutinise very carefully details of the subsidies, the conditions attached to make sure of their compliance with state aid and single market rules," Commission competition spokesman Jonathan Todd said.

Peugeot and Renault are due to report full-year results on February 11 and 12 respectively. Both have already reported a slump in full-year sales and cut profitability targets. Analysts say they may still miss these targets, but attention will focus on their cash positions, and the steps taken to reduce stocks of unsold vehicles. Peugeot is expected to post earnings before interest, tax, depreciation and amortisation (EBITDA) of 3.898 billion euros, according to an average of forecasts by 17 analysts, compared with last year's 5.325 billion. Renault is expected to post EBITDA of 3.648 billion, compared to 4.246 billion last year.

Iceland’s week-old government was locked in its first serious crisis on Monday after the governor of the central bank accused it of instigating a "political attack" against him and angrily rejected a demand by the new prime minister to resign. David Oddsson, a feisty former prime minister and architect of the free market reforms that revolutionised Iceland’s economy and then led to its collapse, was reacting to a letter from the new prime minister demanding his resignation. He said such a letter was "unheard of", amounted to an attempt to "purge" the central bank of its governors and breached "laws which guarantee the independence of central banks and prevent a political attack on the board of governors". The face off between one of Iceland’s most experienced political brawlers and Johanna Sigurdardottir, the country’s neophyte prime minister, is likely to further undermine international confidence in Iceland’s ability to handle its most severe economic crisis in recent history.

The economy is expected to contract 9.6 per cent this year, according to the International Monetary Fund, which led a $6bn bail-out together with Nordic nations to try to prevent the country from entering a severe and prolonged depression. The dispute raises a series of questions. For international investors, the sight of a country’s prime minister and central bank governor engaging in a very public row will do little to shore up confidence in the administration’s problem-solving abilities. This issue is especially important as foreign investors still hold around IKr400bn ($3.6bn, €2.7bn) of Icelandic bonds and the central bank has warned it should be prepared for a "massive currency outflow" once its currency is fully refloated. Capital controls still prevent the currency from trading freely internationally. It is understood that the government is to hold special meetings in the near future with the holders of these bonds to try to reassure them, and may also offer them a way to sell their holdings.

The second issue is that the decision by the new government to intervene directly in the affairs of the central bank could call into question Iceland’s ability to abide by a structural reform programme devised by the IMF as part of its multi-billion dollar bail-out. The IMF is releasing its financial support in tranches that are conditional on the government implementing structural reforms. The new government has already indicated it is unhappy with some of these reforms and may seek to renegotiate them. One of its key concerns is the level of interest rates, which are currently 18 per cent and which the new government has said it is keen to reduce. Although it has since indicated it will try to abide by the IMF programme, the fact remains that the independence of the central bank – which sets rates – has been called into question by an administration that is less than fully committed to the IMF reform package and may seek to intervene again.

Any signs that the IMF package may be renegotiated could have further damaging consequences, as the IMF only provided around $2bn of the rescue package with the rest contributed by Iceland’s Nordic neighbours. These countries have also stated that their financial support is conditional on the implementation of the IMF package and they could decide to withdraw it. A third point of concern expressed by officials in Iceland is disappointment at the political naivety demonstrated by Ms Sigurdardottir in trying to humiliate Mr Oddsson into resigning. Mr Oddsson was the country’s longest serving prime minister and a leading figure in Iceland’s tightly-knit political world. He is renowned for being proud of his achievements as well as being a tricky character to deal with. Mr Oddsson, a member of the right-leaning Independence party, was prime minister between 1991 and 2004. He was appointed governor of the central bank in 2005 and is serving a seven-year term.

The government does not have the power to sack him but is in the process of enacting new legislation that will allow it to do so. "The legislation now before parliament about restructuring of the central bank is of high importance and it will be passed as soon as possible," the prime minister said in a statement Monday. Officials in Iceland said this law could take several weeks to pass, raising the prospect of a long, drawn-out and damaging battle of words between the two. Mar Gudmundsson, deputy head of monetary and economic affairs at the Bank for International Settlements, has been asked to take on the post of central bank governor, according to local news reports. The Independence party, led most recently by Geir Haarde, collapsed after Mr Haarde said he would step down because he is suffering from cancer. The Social Democrats – its coalition partner – then withdrew from the coalition and formed a new government with the Left-Greens, which have benefited from a huge public shift in sentiment to the left.

Ireland is cracking down on its banks by linking a €7bn (£6bn) rescue package to cuts in senior bankers' pay. As the British government comes under pressure to curb bonuses, Dublin has announced it will recapitalise Allied Irish bank and Bank of Ireland only if the banks agree to slash executives' salaries. It is insisting that financial aid is dependent on the banks freezing home repossessions and giving more credit to Irish business. Irish finance minister Brian Lenihan warned there would be "tough talking" to the banks before the government implemented the financial aid plan.

"The government wants certain clear commitments form the banks in relation to lending to small enterprise, to securing people who are facing the threat of repossession and in relation to the whole area of salaries, bonuses and remuneration," he said. Lenihan said the government also wanted "dramatic reductions" in all levels of senior bankers' pay and bonuses. The decision to inject €7bn of Irish taxpayers' money into the two major banks will be taken by the Irish cabinet tomorrow, although the decision may not be announced until Wednesday.

The minister also warned there would be a freeze on social welfare payments this year as the government sought to cut Ireland's public deficit by more than €2bn. His ministerial colleague, the Green party's environment minister, John Gormley, said there was huge public anger over plans to recapitalise the banks. Opposition parties in the Dáil (Irish parliament) have warned that if the latest rescue package fails, the republic's entire economy could be in jeopardy. In recent months Ireland's banks have turned off the credit tap to businesses and individuals. Figures from Ireland's Central Bank showed that lending to Irish enterprises fell by €2.8bn in December.

Ulster Bank, meanwhile, which is owned by the Royal Bank of Scotland, has yet to decide if it will pay bonuses to senior staff. A spokeswoman for the bank said it was unable to say when the decision on bonuses would be made. Ulster Bank, which has a strong presence in the republic and Northern Ireland, is planning to lay off 750 workers this year. The stalled decision on bonuses comes after it emerged that RBS was planning to hand out £1bn in staff bonuses weeks after the British government bailed out the bank, costing the UK taxpayer £20bn.

Latvia’s economy shrank 10.5 per cent in the fourth quarter – by far the steepest decline in the European Union – as its consumer boom turned to bust amid the global financial crisis. Latvia, which until recently had been the EU’s fastest growing economy, was forced to seek an IMF-led €7.5bn stabilisation package at the end of last year after a domestic banking crisis endangered its exchange rate peg. The economy slowed sharply last year after a real estate boom collapsed and banks began to tighten lending. Latvia then entered recession in the third quarter, when gross domestic product fell 4.6 per cent, as the global financial crisis struck. The fourth quarter contraction is the worst since quarterly surveys began in 1995. The pace of this decline will raise fears that the country’s recession will be so deep and so prolonged that the IMF package might unravel. The IMF package assumes the economy will contract by 5 per cent this year. A steeper fall would force the government to make tougher budget cuts to keep the deficit in line. "There is a concern that ever tighter economic policies send the economy into an extended downward spiral, which results in missed budget targets, repeated rounds of fiscal tightening, further growth downgrades etc. and ever growing speculation that the currency peg will eventually be scrapped," RBC of Canada warned recently.

As a condition of the IMF loan agreement the government passed an austerity package of spending cuts and tax rises at the end of last year amounting to 7 per cent of GDP. The government is expected to announce a package of further budget cuts next month to keep the deficit below 5 per cent of GDP this year. The pain of the economic contraction will also increase the risk of political turbulence and backsliding on the IMF deal. Demonstrators rioted in the capital Riga last month and opposition parties tried to bring the government down in a vote of no confidence last week. To soften the effects of the contraction and stimulate growth the government agreed an action plan last week. This includes measures to boost competitiveness, speed up spending on EU-funded projects and stabilise the banking sector. To help fund this the European Investment Bank will provide an extra €250m in funding for EU structural fund programmes. Ilmars Rimsevics, governor of the central bank, told the Financial Times on Friday that the government and foreign-owned banks must stimulate the economy to prevent a prolonged recession. Mr Rimsevics said the Bank of Latvia now expected the economy to contract by between 7 per cent and 8 per cent this year, compared to its previous forecast of a 5 per cent decline.

Ukraine has appealed for emergency loans from the world’s richest countries to help support its economy, which has been battered by the global financial crisis. Yulia Tymoshenko, prime minister of Ukraine, said her government had sent letters to the US, Russia, China, Japan and the European Union asking for loans to fill a shortfall in budget revenues for this year. "We have already received a positive response from some countries, including Russia," Ms Tymoshenko said at the Munich Security Conference at the weekend. "Russia is ready to sign such loan agreements." She did not clarify how much Kiev was seeking to borrow but reports in Ukraine suggested Russia could lend $5bn (€3.9bn, £3.4bn). Ms Tymoshenko said Ukraine was keen to harmonise relations with Moscow, soured after last month’s gas prices dispute. She insisted Kiev would stick to a western integration agenda that included efforts to join the European Union and Nato. News that Ukraine was seeking emergency loans amid frozen credit markets comes days after a senior International Monetary Fund delegation warned of "serious problems" brewing in Ukraine’s economy.

The fund delegation ended its one-week visit to Kiev last week but provided no clear signal on whether it would grant further disbursements from a $16.5bn standby facility agreed last year. Ukraine received a first tranche of $4.5bn last November. Future disbursements depend on the implementation of tough conditions and are needed to keep Ukraine’s currency, the hryvnia, stable. It lost nearly 40 per cent of its value in 2008. The IMF’s concerns centre on Kiev’s 2009 budget, which has a 3 per cent deficit in spite of a fund stipulation it be deficit-free. It also seeks a freeze on social spending at a time when more than 1m out of a population of 46m have lost their jobs. Ukraine’s gross domestic product is expected to contract by around 5 per cent this , thus curbing budget revenues, complicating the state’s ability to rescue shaky banks and to provide unemployment benefits. Ukraine is struggling to tame annual inflation of more than 20 per cent and to adjust to a fourth stiff price rise on natural gas imports from Russia in as many years. The US and other western nations are keen to stabilise Ukraine for geopolitical as well as economic purposes, given its important position in Eastern Europe as a neighbour of Russia.

Vladimir Putin ordered a crackdown today on insider trading in Russia's ailing stock markets and said that the country should create its own debt ratings agencies. The Russian Prime Minister said that traders guilty of insider dealing would face prison terms of up to seven years under proposed new legislation. He told Cabinet ministers: "Punishment for these wrongdoings should become real and unavoidable." He also said that ratings agencies should seek accreditation from the Finance Ministry in future, only a week after Russia's long-term local and foreign currency rating was downgraded by Fitch Ratings. He said that international agencies failed to understand the Russian markets.

"We are interested in the appearance of powerful domestic ratings agencies, which will have a fuller knowledge of Russian market peculiarities and will offer accessible and quality terms not only to large companies but also to medium businesses," Mr Putin said. Russian companies were totally dependent for their debt ratings on foreign agencies, which were "focused on the economies, customs and business practices of other states". Mr Putin added: "All of us understand the enormous influence of ratings agencies and drastic effects their mistakes, let alone abuses, may have." He said that accreditation would be voluntary, however. Recognition of an agency would imply the Finance Ministry's seal of approval for "the correctness of its evaluations and conclusions".

"In turn, that will give more reliable guidelines for investors and do away with the absurd situation in which entities evaluating the reliability of others are exempt of any control," Mr Putin told ministers. Fitch's decision to downgrade Russia from BBB+ to BBB came amid concerns over the impact on its economy of falling oil and gas prices, and a draining of foreign capital. Moody's and Standard & Poor's took similar action in December. Vladimir Milovidov, head of the Federal Financial Markets Service, said that Russian media could also face prosecution for publishing information "that can impact market trends". The service would investigate if evidence emerged of corrupt dealings between editors and company directors.

Insider trading in Russia is widespread but offenders are rarely caught and face only fines under existing legislation. Mr Milovidov said that only two cases had been recorded in the past two years. Government amendments introducing jail terms will go to the Duma, the lower house of the parliament, which began considering a new Bill against insider dealing in December. Vladislav Reznik, head of the Duma's financial markets committee, said that he expected the legislation to be ready by May.Russian stock exchanges have been hammered by the global economic crisis. The dollar-denominated RTS index has lost three quarters of its value and the rival Micex exchange, which trades in roubles, is down by two thirds.

Last week the head of Hong Kong's Monetary Authority Joseph Yam warned local legislators that Financial Tsunami Part II could soon hit Hong Kong and other Asian markets. He has said this a couple of times, and investors seem unmoved as share prices both here and in China both finished the week higher. Perhaps Yam's pronouncements don't carry the sway of a Fed Chairman but they are worrying enough to take a closer looking at, and may offer clues to the upcoming Hong Kong Budget. One explanation could be Yam is just feeling a bit down after the HKMA Exchange Fund lost a record HK$74.9 billion ($9.66 billion) last year.

Yam has also been in the firing line for letting Hong Kong residents buy HK$20 billion of now-worthless Lehman Brothers-backed mini-bonds on his watch. Hardly the finale he might have wished for as he gets set to retire this year from his job as the world's highest-paid central banker, with a cool HK$11 million in salary. It could be argued there are encouraging signs the worst of the financial crises is behind us. We have had global bailout packages for banks, loan guarantees and mega stimulus packages. But if we look at previous crises in Hong Kong, it could pay to be on guard. While the Asian financial crisis 12 years ago started in Thailand and spread around the region domino-style, the final act took another year to play out, with a crescendo of selling in Hong Kong.

Yam's argument runs that, while the global financial system has been patched up to avert a collapse, Asian economies have in the meantime weakened considerably, leaving them exposed as the huge leverage built up in the boom days unwinds. Here he is talking not about collateralized debt obligation or other exotic derivatives, but rather the wholesale corporate debt market. Hong Kong is possibly a uniquely international banking market, with the world's 500 largest banks doing business here, according to HKMA records. This vast pool of liquidity is one reason Hong Kong is credited as the biggest foreign direct investor in China. This year it's estimated up to US$22 billion of syndicated corporate loans will mature here, and foreign lenders account for roughly 40% of that.

The worry now is that foreign banks, beset with problems at home, will baulk at rolling over these loans. This could potentially trigger a wave of corporate collapses. Yam describes this as the danger of "financial protectionism," where foreign banks are going to focus on lending in their own backyard. Perhaps this is an understandable consequence of the post-credit-crunch financial world. Will banks bailed out by U.S. or U.K. taxpayers still have an appetite to lend working capital to a manufacturer in Guangdong to save jobs there? Going by the size of the international finance sector in Hong Kong, it would leave a big gap if such capital retreats. Yam did say, however, that Hong Kong is in a strong position -- the HKMA Exchange Fund topped $202 billion at end of 2008, of which $129.9 billion was foreign currency.

He also added -- rather ambiguously -- that the government will look at providing assistance if troubles materialize. Perhaps there will be some business-friendly packages when Budget Day arrives on Feb. 27. It will be worth considering how HSBC Holdings is positioned. HSBC serves as Hong Kong's de facto central bank and was one of the first to warn back in September that this credit crunch would be worse than the one a decade ago. It is likely to be under pressure to pick up the slack if foreign lenders retreat. HSBC in the past has stepped in when local banks got into trouble, such as by taking over Hang Seng Bank. HSBC also avoided taking funds from the U.K. government, but it is now facing speculation it needs more capital. Whatever assistance the HKMA or government comes up with is likely to be politically charged.

Hong Kong corporations are not, by and large, wholly institutionally owned like in Western markets, but rather are controlled by family tycoon shareholders. Any direct assistance may expose the government to charges of bailing out the corporate elite at a time when ministers say there is nothing in the kitty for give-aways for the wider population. Hong Kong's South China Morning Post even carried an opinion piece saying the government shouldn't run an economic stimulus package. That probably reflects the look-out-for-yourself ethos in Hong Kong. And in the corporate world, when things get tough, Hong Kong usually plays by the laws of jungle: Ailing firms die or are swallowed up by the bigger guys. Perhaps this was why, last month, stalled legislation for a new bankruptcy protection law was resurrected. It will be worth watching closely if Yam's warnings on financial protectionism come true and what, if anything, the Hong Kong government might do about it. Some legislators suggested a good start would be to review salaries at the HKMA.

Just how fast is China growing –- or is it growing at all? Obtaining precise answers to these questions has become increasingly urgent for many economists and investors as they try to gauge trends in the world’s third-largest economy. It’s not clear that China’s statistics are wildly inaccurate, or even intentionally manipulated, as has long been argued by some economists. But the numbers are funky, to say the least. The National Bureau of Statistics says China’s gross domestic product expanded 6.8% in the fourth quarter of 2008,when compared to the same quarter of the previous year. That’s a sharp slowdown from 9% growth in the third quarter, 10.1% in the second and 10.6% in the first.

Those year-on-year comparisons are the norm for China and avoid confusion arising from short-term changes in the economy. But the annual comparison also smoothes over the most recent changes, so it doesn’t convey as much information about what has just happened. That’s one reason many developed economies report GDP in terms of the change from one quarter to the next. Quarter-on-quarter figures are usually seasonally adjusted (to account for patterns peculiar to one time period, like Christmas shopping in December) and annualized (to show what the rate of change would be if it continued for a full year). The resulting data can show very different trends: U.S. gross domestic product, for instance, decreased 0.2% in the fourth quarter on a year-on-year basis, but the annualized, seasonally-adjusted quarterly change was -3.8%.

For China, there’s been lots of debate recently over what quarter-on-quarter change is implied by the 6.8% year-on-year growth rate. The estimates range widely, from about a 1% decrease to a 4% increase. And there’s no official answer: The NBS says it has been working on its own calculations of quarter-on-quarter growth rates but has not yet published the figures because the technique needs more work. Clearly, there’s not much consensus on what the seasonally-adjusted quarterly figure for China was, and for good reason. As Albert Keidel of the Carnegie Endowment pointed out in a recent presentation in Washington, not only are there large seasonal variations in quarterly GDP, but the pattern of those variations has changed greatly over time. So it’s easy to come up with different seasonal adjustments, which in turn yield very different final results.

What’s the upshot of this disagreement? While it’s hard to rely on any single estimate as authoritative, there seems to be a rough consensus that the economy was at least still growing in the fourth quarter. "I think we can be very confident that it’s positive and fairly confident that it’s between 2% and 4% quarter-on-quarter annualized. Within that range it’s anyone’s guess," said Yu Song, economist for Goldman Sachs. It’s also impossible to avoid the conclusion there are some problems with the source. "These data are really dicey to use," Keidel said. "I think we’ve got a long way to go before we can really rely on quarter-to-quarter seasonally adjusted data." In the end, the attempt to derive quarter-on-quarter growth figures may not tell us much more than we already knew from the year-on-year figures: that the momentum of China’s economic expansion slowed sharply in the fourth quarter of 2008.

Economists may differ on the extent of the slowdown, but their confusion is shared. "The numbers are strange, to say the least," said Standard Chartered’s Mr. Green, in a recent report explaining his calculations. "The NBS is doing itself no favors. The lack of a revised quarterly GDP series and any explanation of how the 2008 numbers were calculated only increases suspicion that the data is being deliberately manipulated." The head of NBS, Ma Jiantang, strongly disputes such suspicions. In a recent interview with the People’s Daily newspaper, he admitted that there is room for improvement in China’s GDP calculations, but insisted its methodology is still fairly advanced for an Asian country.

"After the figure of 6.8% for China’s GDP growth in the fourth quarter of last year was published, I heard two opinions coming from abroad. One is that the figure is higher than in reality: ‘You have negative growth in electricity consumption, so how can GDP be growing by 6.8%?’ People who hold this view do not actually understand the internal relationships of different factors in the economy. Another opinion is that the figure is deliberately low: ‘The Chinese government has deliberately lowered the previous year’s figure in order to make advance preparations for achieving the 8% target for 2009.’ This is a completely subjective assumption, without any evidence," Mr. Ma said.

China promised Monday to avoid "Buy China" protectionist measures in its multibillion-dollar stimulus and appealed to other governments to support free trade. "China will not practice `Buy China.' We will treat domestic and foreign goods equally so long as we need them," said a deputy commerce minister, Jiang Zengwei, at a news conference. Jiang made no mention of controversy over a measure in Washington's proposed stimulus to favor U.S. iron and steel producers, which has drawn criticism from Japan, Australia and Canada. But he called on foreign governments to promote trade. "Under these circumstances, I believe every country must energetically develop international trade," Jiang said. "Why would one want to practice protectionism in the current situation?"

The impact of the global economic crisis on China is growing, Jiang said, though he gave no details and did not respond to a question about January's economic performance. The government has yet to release January trade or other figures. Jiang said Beijing is stepping up measures to generate jobs and reduce reliance on cooling exports. He said they include a campaign to expand China's retailing industry by supporting the creation of 150,000 small shops in the countryside this year. "This initiative can be seen as a very strong push toward employment," he said. The government says at least 20 million migrant workers have lost their jobs due to global turmoil and it is trying to avert rural unrest.

A stimulus bill under consideration by the U.S. Senate would require that American-made iron or steel be used in projects paid for by the bill. President Barack Obama has expressed concern about the provision and critics have warned that it might spur foreign governments to impose their own protectionist measures. Senators agreed to specify in the bill that international trade agreements may not be violated. But they rejected a proposal to remove the requirement. China launched a 4 trillion yuan ($586 billion) stimulus in November that is aimed at insulating the country from the global downturn through higher spending on construction and other projects. Authorities hope that will fuel higher consumer spending. Foreign companies are worried Beijing might try to favor Chinese companies. But measures announced so far appear to treat suppliers equally. The government says foreign appliance manufacturers are eligible to take part in a program that subsidizes purchases of electrical goods by rural households.

It’s official. Joblessness is fast rising in India. With overall economic growth sharply slowing down, the ranks of those without work are growing by the day. Five hundred thousand people were rendered jobless between October and December 2008, according to a first of its kind survey conducted by the Ministry of Labour and Employment. With the global slump, the fortunes of those who work in the export industry have become equally bleak. India could lose up to 1.5 million jobs in this sector in the six months to March 2009.

The labour ministry’s numbers are based on a survey of 2,581 units covering 20 centres across 11 states. Eight major sectors like the textiles and garment industry, metals and metal products, information technology and business process outsourcing, automobiles, gems and jewellery, transportation, construction and mining industries were included. The total employment in these sectors had come down from 16.2 million in September 2008 to 15.7 million by December 2008 due to the R-word stalking Indian industry. India’s exports, too, have been contracting every month since October 2008 due to demand destruction in the US and Europe. Many units have downed their shutters and laid off staff. If these projections continue, it is quite likely that you can expect another 500,000 job losses before March 31, stated G.K. Pillai, commerce secretary, after announcing earlier that 1 million jobs had gone since August.

Interestingly, more up-to-date economy-wide estimates of unemployment — based on extrapolations from recent trends — are consistent with the above numbers for job losses this year as growth is likely to decline to 7 per cent as compared to 8.8 per cent per annum during the last five years. But with India’s growth expected to plunge to 5 per cent next year, the incidence of joblessness will, of course, be more severe than before. A disturbing trend of India’s economic performance is a deceleration in employment growth to 1.92 per cent per annum from 1993-94 to 2006-07 from 2.61 per cent between 1983-1993-94 although growth in terms of gross domestic product (GDP) was rapid. Clearly, there has been a decline in employment per unit of GDP growth or employment elasticity to 0.28 from 1993-94 to 2006-07 from 0.52 over the years 1983-1993-94.

Applying this elasticity to the likely GDP growth of 7 per cent in 2008-09 and 5 per cent in 2009-10 to project the generation of employment provides an average of 8 million work opportunities this year and 6 million the next. This is much short of the 10 million opportunities generated during each of the last five years. In other words, there will be 2 million fewer jobs than before this year and 4 million fewer jobs next year. Official number crunchers would perhaps suggest that a better measure is to focus only on non-agriculture. Even on this basis, the economy would turn out 1 million fewer non-agricultural opportunities this year and 2 million fewer the next than the average of 5.6 million jobs per annum during the growth boom of the last five years. This striking shrinkage of employment opportunities when 9 to 10 million people join the labour force each year looking for work will certainly result in a spike upwards in unemployment and exacerbate social tensions.

For Paris’s Notre Dame Cathedral, the economic crisis is turning into manna from heaven. Thanks to French government efforts to stimulate the economy by expediting funding for neglected cultural projects, the cathedral will get 2 million euros ($2.6 million) to restore in May its "epi de faitage," the 12th-century spire that soars about 45 meters, or 147 feet, above the city. The 18 months of work will provide jobs to roofers, scaffolding builders, engravers and other craftsmen. "Sorry to say it, but Vive la Crise!" said Benjamin Mouton, 60, the architect in charge of restoring the top of the 664-year-old Gothic edifice. "I can only applaud the state’s decision to spend money right now on heritage and to get these craftsmen to work. It shows it has values, even in hard times."

The cathedral is among 252 heritage sites in France that were earmarked for state largesse on Feb. 2 in President Nicolas Sarkozy’s 26 billion-euro stimulus package. France, which draws more visitors than any other country, is allocating an extra 100 million euros a year through 2012 for its monuments budget as part of the 1,000-project plan that includes roads and aid to the auto industry. On the monument list are the 1745 Chateau du Taureau in Brittany, remodeled by Louis XIV’s architect Vauban; the stained-glass windowed Strasbourg Cathedral; former offices of the North Atlantic Treaty Organization in the Chateau de Fontainebleau; and the Europe and Mediterranean Civilization Museum project in the coastal city of Marseille.

With 82 million visitors annually, France’s culture and heritage are "as much business as pride," Christine Albanel, the minister of culture, said in an interview in Paris. The "culture sector" represents 400,000 jobs and a tenth of these are craftspeople, with "fragile, unique knowledge that we have to help survive even through the meltdown," she said. She said she couldn’t say how many jobs would be created under the plan. "In crisis times, everything that is about identity is very important," Albanel said. "That’s why culture is part of the stimulus package. It’s a way to keep the French cultural exception alive." France, the euro area’s second-largest economy, lost 217,000 jobs last year. The European Commission forecasts the unemployment rate will rise to 9.8 percent this year and to 10.6 percent next year, from 7.7 percent in the third quarter.

The commission expects the economy to shrink 1.8 percent this year, the worst performance since World War II. A November government report showed property developers may cut 45,000 jobs this year. The state spending will "help our craftsmen across all regions," Christophe Eschlimann, the president of the 60-year- old Historical Monuments Restoration Companies’ Association, said in an interview. He said the state had delayed many projects since the beginning of the millenium, "making these workers an endangered species." In Brittany, in France’s northwestern corner, the government’s plan would help restore citadels and castles that were once the frontlines of battles with a former age-old enemy, England. The stimulus package helps complete "big projects that would have waited another few years," says Henry Masson, the curator in charge of Brittany’s 3,000 monuments.

One of these is the Vauban fort facing the town of Morlaix on the Atlantic coast. The fort was built to fight the English enemy in the 14th century. The castle is getting 150,000 euros in state aid to restore the stone facade on its upper edges and its terraces, Masson said. He will also oversee the 800,000- euro stonemason and carpentry work for redoing the apse of the Saint Etienne cathedral in Saint-Brieuc. For some monuments, the aid is too little too late. "For old buildings, some restoration was so urgent that the time we’ve lost in the previous years will make it all the more difficult and costly," Masson said. Also, this can’t just be a one-shot effort, said Eschlimann. "Heritage conservation needs more than a one-year stimulus," he said.

A 2007 report by the ministry of culture showed that 20 percent of the country’s 14,897 protected monuments face a "partial or imminent threat" and have seen increased deterioration since the previous report in 2002. "It’s useless to be proud of our French heritage and continue to skimp on maintaining it," Sarkozy said in a September 2007 speech when he opened the national Cite de l’Architecture in Paris. The stimulus plan comes on top of the culture’s ministry’s annual budget for monuments of around 305 million euros. The "bonanza plan" is a "breath of fresh air," reviving urgent projects, said Masson. "We held back some of them because spending big sums during a budget restrain would have made us look bad."

Saddlebrook Golf Course took a look at the bottom line and decided it was time to cut some deals, offering a two-year membership for nearly 80 percent off the normal daily rate. In neighboring Illinois, greens fees at the Greenview Golf Club in Centralia are down from $35 a round to $23, which includes a cart. The struggling economy has buried many golf courses in a financial sand trap, forcing owners to offer deep discounts to keep players and recruit new members. Others are putting up "for sale" signs or seeking new financing to stave off foreclosure. "Nobody's making a living," said Greenview owner Tom Wargo, the 1993 Senior PGA champion and 1994 Senior British Open champion. Indeed, with the economic meltdown affecting even such sports superpowers as the NFL and NASCAR, it's understandable that recreational golf is hurting.

Golf has always been a pricey pastime. The median rate for a round of 18 holes at a public course is about $40, and private club memberships can run well into the thousands of dollars. Now throw in a recession and a tough situation for the nearly 16,000 public and private courses in the United States becomes even worse, said Mike David, executive director of the Indiana Golf Office, the umbrella group for the state PGA and other golf programs. "It's not that there are fewer people playing," he said. "The problem is they're not playing enough rounds." The National Golf Foundation reports golfers played about 498 million rounds in 2007. That number dropped about 8 million, or 1.6 percent, through the end of November, the most recent month surveyed, said Jim Kass, research director of the Jupiter, Fla.-based foundation. The result is that more golf courses are closing than opening, a sharp change from as recently as 2001, when 252 more courses opened than closed. The National Golf Foundation says 113 courses opened and 121 closed in 2007, and 2008 -- for which it did not have final numbers -- was on track to post the lowest number of openings in two decades.

More hazards may be on the horizon. Developers of a $500 million golf and wine resort in Yakima, Wash., filed for bankruptcy protection in November, just two months after breaking ground on the project, and Georgia's exclusive Sea Island, once called the best golf resort in the nation by Golf Digest, laid off 500 employees last fall. Northgate Golf Course in Reno, Nev., considered one of the best new courses in the country when it opened 20 years ago, announced in January it would close because it's losing money. Once a site for U.S. Open qualifying, Northgate stands to lose $530,000 in the current fiscal year, according to the Reno-area tourism board that operates the course. Kathy Bissell, national golf course sales director for Coldwell Banker Commercial in Jacksonville, Fla., said buyers can still be found -- and financing obtained -- for courses that are priced correctly. "But what we see a lot of are courses that don't have an appropriate level of net operating income for the price the owner would like to have," Bissell said.

That's where courses like Saddlebrook hope to make the difference. The 17-year-old course on Indianapolis' northwest side still gets most of its revenue from public play, including a number of Indianapolis Colts, who like its proximity to the NFL team's headquarters. The course is offering a two-year membership with unlimited play Monday through Friday for $198. Normally, it's $26 a day, or $475 for one year, said Drew Breeden, the assistant pro at the Indianapolis club. "It's a different way of approaching membership," he said.It's also a lot cheaper than many private clubs, which don't charge greens fees but often require initiation fees and monthly dues. Those clubs, too, are seeking new ways to boost revenue. The Sagamore Club, a Jack Nicklaus-designed course in the northern Indianapolis suburb of Noblesville, started with about 150 members in 2003. Membership has more than doubled since then but has remained fairly flat in the past year, even as operating costs have soared, said Scott Van Newkirk, senior vice president of Arizona-based Troon Golf, which operates Sagamore.

"The industry has been stagnant for a number of years. The demand for memberships has not been what it has been in the past," Van Newkirk said. The club is trying to bring in more capital by offering shares of ownership to its members, and potential members are being offered reduced initiation fees. Wargo, owner of the Greenview club in Illinois, wants out of the business. His course is on the market for $1.9 million. "Golf's not in a good position right now, even though we have the No. 1 recognized athlete in the world (Tiger Woods)," he said. "It's not helping the business at all." Dick Sills, general manager of the Indianwood Golf & Country Club in Indiantown, Fla., doesn't expect that to change anytime soon. His business was down 18 percent through November, and the course has cut its fees in hopes of enticing more golfers. "It's down, but it's not as bad yet as it might get. I think it will get worse," he said. In the long haul, that may be bad news for golfers, giving them fewer playing options. But Chicago doctor Larry Stone, an avid golfer for 50 years, sees at least one benefit from the recession. "You can walk onto most of them at any time except Sunday morning," he said.

Ilargi: I thought everybody had seen this graph by now. Guess not. It's from Speaker Nanci Pelosi's office.

This chart compares the job loss so far in this recession to job losses in the 1990-1991 recession and the 2001 recession – showing how dramatic and unprecedented the job loss over the last 13 months has been. Over the last 13 months, our economy has lost a total of 3.6 million jobs – and continuing job losses in the next few months are predicted. By comparison, we lost a total of 1.6 million jobs in the 1990-1991 recession, before the economy began turning around and jobs began increasing; and we lost a total of 2.7 million jobs in the 2001 recession, before the economy began turning around and jobs began increasing.

The following is an excerpt from "Plunder and Blunder: The Rise and Fall of the Bubble Economy" by Dean Baker, published by PoliPoint Press, 2009.

The stock market and housing bubbles were the central features of the U.S. economy over the last 15 years. The stock bubble propelled the strongest period of economic growth since the late 1960s. The housing bubble lifted the economy from the wreckage of the stock bubble and sustained a modest recovery, at least through 2007. However, financial bubbles by definition aren't sustainable, and when they collapse, they cause enormous social and economic damage. The economy had no problem with financial bubbles during its period of strongest and most evenly shared growth, the years from 1945 to 1973. It only became susceptible to bubbles after the pattern of growth had broken down? -- when most workers no longer shared in the benefits of productivity growth, and businesses no longer routinely invested to meet increased demand based on growing consumption. We don't have enough evidence to say that bubbles are a direct outgrowth of inequality, but, again, we do know that bubbles weren't a problem when income was more evenly distributed.

The bubbles were allowed to grow only because the people in a position to restrain them failed in their duties. The leading villain in this story is Alan Greenspan. Greenspan mastered the art of currying the favor of the rich and powerful and held top economic positions under five presidents of both political parties. He also managed to gain a near cult-like following among the media. As a result, most of the public is largely unaware of how disastrous the Fed's policies under his tenure were for the economy and the country. Most of the economics profession went along for the ride, somehow managing to miss a $10 trillion stock bubble in the 1990s and an $8 trillion housing bubble in the current decade. If leading economists had recognized these bubbles and expressed concern about the inherent risks, they could have alerted the public and forced a serious policy debate on the problem. Instead, the leading voices in the profession joined the chorus of Greenspan sycophants, honoring him as potentially the greatest central banker of all time.

The financial industry proved to be more incompetent and corrupt than its worst critics could have imagined. Did people who manage multi-billion dollar portfolios in the late 1990s really believe that price-to-earnings ratios would continue rising, even when they already exceeded 30 to 1? Or did these highly paid fund managers believe that PE ratios no longer mattered? -- as though people bought up shares of stock because the stock certificates were pretty?It's hard to understand how anyone who managed money for a living could have justified keeping a substantial portion of their funds in the ridiculously overvalued markets of 1999 and 2000. You could play the bubble, riding the wave up and dumping stock before the crash. But a buy-and-hold strategy in 1999 and 2000 was a guaranteed loser. In the late 1990s, Warren Buffet famously commented that he didn't understand the Internet economy, and thus he pulled much of his portfolio out of the market. Buffet understood the Internet economy very well. He recognized a hugely overvalued stock market that was certain to crash. Why didn't fund managers?

The financial industry's conduct in the housing bubble was even worse. House prices had sharply diverged from a 100-year trend without any explanation. Furthermore, vacancy rates were at record highs and getting higher. In introductory economics, we teach students about supply and demand. If the excess supply keeps growing, what will happen to the price? Furthermore, inflation-adjusted rents weren't rising through most of the period of the housing bubble. There will always be a rough balance between sales price and rent. When sales prices diverge sharply from rents, some owners become renters, reducing the demand for housing. Similarly, some owners of rental units convert them to ownership units, increasing the supply of housing.

Decreased demand and increased supply lowers the price; what part of that reality did the highly compensated analysts fail to understand? How could the CEOs of the country's two huge mortgage giants, Fannie Mae and Freddie Mac, have been surprised by the housing bubble? The Wall Street wizards at Merrill Lynch, Citigroup, Bear Stearns, and elsewhere were probably even worse. Did they really have no idea that the bubble would burst and that a large amount of mortgage debt, especially subprime mortgage debt, would become nearly worthless? Did they think that this junk could be made to disappear through complex derivative instruments?

Wall Street sold these instruments to pension funds and other institutional investors. It also persuaded state and local governments to pay them billions of dollars in fees for issuing auction rate securities and for buying credit default swaps and other exotic financial instruments. In addition, many of the same institutional investors lost billions of dollars by holding the stock of companies like Merrill Lynch, Citigroup, and Bear Stearns, the value of which was driven into the ground by very highly paid executives. The real problem is that the public, including many of the pension fund managers who were taken for a ride, still don't understand what has happened. Perhaps the main reason for this confusion has been the quality of economic reporting. The media relied almost exclusively on the folks who got it wrong. The industry bubble-pushers and the bubble-deniers in policy positions were almost the only sources for economic reporting during the bubble years. The vast majority of the people who follow the news probably never heard anyone argue that the economy was being driven by a stock bubble in the 1990s or a housing bubble in the current decade. Such views simply were not permitted. (The New York Times deserves special mention as a media outlet that actively sought alternative voices, especially during the housing bubble.)

Knowingly or not, these outlets have covered up the extraordinary incompetence and corruption that allowed these bubbles to grow. For example, in a recent three-part series on the housing bubble, the Washington Post reported a claim from Alan Greenspan that he first became aware of the explosion in subprime mortgage lending as he was about to leave his post as Fed chair in January of 2006. According to the article, Greenspan said he couldn't remember if he had passed this information on to his successor, Ben Bernanke. This article makes it sound as though the explosion in subprime lending was an obscure piece of data only available to a privileged few. In reality, the explosion in subprime lending was a widely discussed feature of the housing market during the bubble years. If Greenspan was implying that he was unaware of this explosion, he was unbelievably negligent in his job as Fed chair. The notion that Greenspan would have to pass this information on to his successor? -- as though an economist of Bernanke's stature could be unaware of such an important development in the economy? -- is equally absurd. In other words, the Post article helped Greenspan present a remarkably straightforward development? -- namely, the massive issuance of bad loans? -- as complex and confusing.

In the same vein, the Wall Street Journal provided cover for Treasury Secretary Henry Paulson by explaining how the collapse of Fannie Mae and Freddie Mac caught him by surprise. These two financial institutions hold almost nothing except mortgages and mortgage-backed securities. What did Mr. Paulson think would happen to them in a housing crash? The secret of these two bubbles is that there is no secret. Anyone with common sense, a grasp of simple arithmetic, and a willingness to stand up against the consensus could have figured out the basic story. The details of the accounting scandals in the stock bubble and the convoluted financing stories in the housing bubble required some serious investigative work, but the bubbles themselves were there in plain sight for all to see.

The public should demand a real accounting. Why does the Fed grow hysterical over a 2.5 percent inflation rate but think that $10 trillion financial bubbles can be ignored? Where was the Treasury Department during the Clinton and Bush administrations? What about congressional oversight? Did no one in Congress think that massive bubbles might pose a problem? Why do economists worry so much more about small tariffs on steel and shirts than about gigantic financial bubbles? What exactly do the people who get paid millions of dollars by Wall Street financial firms do for their money? And finally, why don't the business and economic reporters ask any of these questions? The stock and housing bubbles have wreaked havoc on the economy and will cause enormous pain for years to come. We can't undo the damage, but we can try to create a system that will prevent such catastrophes from recurring and that ensures that people responsible for these preventable events are held accountable. That would be a huge step forward.

68 comments:

Anonymous
said...

I keep thinking about a graph I saw that shows the 1929-32 market crash annotated with the boosterism of government officials and bankers. The kept proclaiming the bottom, which was nowhere near. I think I saw that someone had started doing the same thing with the current crash. Anybody know where I can find these graphs?

"It's a reminder that this is not the great depression. This is a legitimate recession and it's clearly not over yet. We're going to get more weakness for sure in Q1. But, again this is not the great depression."--UBS economist James O'Sullivan, 1/30/09

"It all depends on the rate at which the economy contracts. This is not a depression. We're not going to get close to that."--Economic forecaster Sean Snaith, Director of the Institute for Economic Competitiveness, 1/31/09

“2009 is going to be brutal. But it’s not that bad...It’s not a depression. … This is sort of a normal, bad downturn.”--Chris Thornberg, co-founder of Beacon Economics and former UCLA economics professor, 1/28/09

"We're in a recession, not a Depression."--from a Washington Times op-ed by syndicated columnist Suzanne Fields, 1/15/09

"We're not going to have a depression. There ain't gonna be no depression."--Bank of New York Mellon Chief Economist Dick Hoey, 1/13/09

"The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion,"

This widely linked article today is brilliant piece of propaganda. One does not have to be a supporter of the stimulus to recognize that. The stimulus amounts to around 8% of that total. In practical terms the stimulus package has nothing to do with that absurd number.

Setting aside that bit of nonsensical framing, about 80% of that total is fictitious. Guarantees and backing of asset values by the Treasury and the Fed for which no money exists. It's pretend money. It's a con. The old confidence game.

Now the day may come when the Fed will print the money but congress is never going to appropriate it in my opinion. It will be a political impossibility. Those Treasury guarantees do not represent the full faith and credit of the United States unless and until congress appropriates the money.

This is the problem Geithner is dealing with in the bank rescue roll out. Trying to find the exact right words to finesse that lack of money while at the same time providing justification for something that has none. Luckily for him probably no one will question him about the fictitious nature of his guarantees because it doesn't occur to them. Critical thinking absent in the presence of a high priest of money.

Even after trillion of dollars of fictitious capital has disappeared off the face of the earth faith in the high priests among the elites and their chroniclers the main stream media remains unshaken.

If, and it's a big if, if questions do arise about where the money will come from then we will suffer another leg down in the markets right away. Otherwise the upside is likely. Panics being reserved for the times when real money from congress or the printing press is needed. When the con game falters a bit.

what's your take on the profits posted today by barclays bank to the tune of 6 billion pounds? Is it a case of massaged accounting where all their toxic assets are hidden on the balance sheet or is it a genuinely 'good' bank? Thanks.

Due to 20 years of ineffective deficit spending, Japan has perhaps the highest national debt relative to GDP in the developed world (about 170% of GDP). One important difference between Japan and the US is that Japan's debt is mostly financed domestically whereas the US debt is largely financed abroad. Japan has been able to service its enormous debt because its citizens are disciplined savers who dutifully buy government debt even at interest rates close to 0%.

My question is this: As unemployment rises in Japan due to the collapse of its export oriented economy, fewer and fewer citizens will have disposable income to invest in government debt. Under these circumstances, how is the Japanese government going to finance itself without raising interest rates to attract foreign investors? Won't elevated interest rates in turn wipe-out most if not all of the government's operating budget?

1)Lol, with so many prominent bloggers,politicians,economists and businessmen saying there will be no depression. We can safely say there will be one.

2) The number of job losses are being deliberately fudged.If canada lost that many jobs than it is obvious that the real number of job losses was over the million mark. China lost more than 70,000 jobs a day according to my calculations last year among rural employees alone. The jobs data is a disaster,i usually double the official figure to get a real idea.

3) The ted spread and libor have come down substantially from their peaks. Does this mean that credit is loosening up?

Thanks for yesterday's picture of a washed-away organ. It looks like a pre-1920 Hamilton. I've got one here in my living room, still in working order.

They were made by the Chicago Baldwin piano company, which survived the 1930's depression only to sink in and out of bankruptcy later. As one history says:

During the 1970s the company made a concerted effort to expand into the financial sector, acquiring savings & loan institutions, insurance companies and investment firms; by 1982 pianos represented only 3% of the company's business, and the following year excessive debt forced the company into bankruptcy.

Moral: Stick to making real things.. but make sure they don't last a hundred years otherwise you'll reach consumer saturation,

"the link to "Japan faces ‘unimaginable’ contraction" loops back to itself."

Fixed that, thanx. You have to go through Google news to access the article, it's FT.

I hope everyone reads it. Japan GDP falls 10% annualized, 3% in one quarter. Exports are down 44.1% from a year ago. Machinery orders fell 27%.

This is a collapse, not just a crisis. The US, Canada, UK and Europe are still talking about 1-2% GDP contractions, not 10%. But what is there that will keep us from going into the numbers Japan now reports?

If the US economy falls along a 10-12% GDP drop trendline, prepare for full frontal panic. The country can't take it.

Found a interesting trigger of a lot of what happened sept 15 last year...remember when all the big ones were shook up?http://www.youtube.com/watch?v=_NMu1mFao3w This is how they scared the congress out of their wits...

The final blow will be the collapse of health care. Too many people are losing their jobs and health insurance as they enter the years when health issues become far more frequent occurances.

Even relatively healthy middle-aged individuals and familes are being absolutely devastated by the incredibly oppressive cost of health care.

Suffice to say, no economic momentum will gather while the commoners are crushed by health care costs.

Even the employed will eventually crack under the weight of co-payment and deductible costs, not to mention exclusionary pre-existing clause practices. More and more people will simply opt out for the medical death sentence. Sons and daughters will watch their parents expire, devoid of medical care due to prohibitive costs.

And the people who endure this economic injustice and emotional tragedy will live on to watch huge sums of cash being shoveled into the vaults of their financial masters--all in the name of what's best for them.

"This is a collapse, not just a crisis. The US, Canada, UK and Europe are still talking about 1-2% GDP contractions, not 10%. But what is there that will keep us from going into the numbers Japan now reports?

If the US economy falls along a 10-12% GDP drop trendline, prepare for full frontal panic. The country can't take it."

The first paragraph sounds like you expect a 10% contraction, while the 2nd paragraph less so. Could you please clarify.

In 1913, prior to the passage of the Federal Reserve Act President Wilson’s The New Freedom was published, in which he revealed:

“Since I entered politics, I have chiefly had men’s views confided to me privately. Some of the biggest men in the U. S., in the field of commerce and manufacturing, are afraid of somebody, are afraid of something. They know that there is a power somewhere so organized, so subtle, so watchful, so interlocked, so complete, so pervasive, that they had better not speak above their breath when they speak in condemnation of it.”__________________________________

Any way we dice and slice things, (new bank, good bank, bad bank, so so bank, dream bank) -- what real change for the better will ever happen when the above is still true?

The game is for "them" (Fed, Central Banks, Rothschilds, Rockefellers, Kings, Queens)to get richer and the people to remain poor through subjugation and exploitation.

The middle class (an anomoly in the history of the working man)emerged as an unwanted side effect (through unionization)in the re-building period after the world wars.

Now the middle class is being stripped of their wealth. The boomers who have had "apparent" prosperity during the "good times" of the re-building and subsequent growth period, have been held upside and shaken by the "owners of the system" until every last nickel they made has fallen out.

Yes, the market fluctuates, and every so often the owners of the system rig created the market crashes that "fluctuate" the average Joe out of his hard earned money.

When it is all said and done, we work to eat and that is for the most fortunate on this orb. For too many people adequate nutrition is a "luxury" they'll never experience.

Why do so many people want to return to how it was before the crisis? It would be the same system which will eventually fleece you of your wealth. Very few people cash out and take their profits when the times are good. They are programmed through hype, misinformation and greed that their assets will continue to increase in value. So, they continue to let it ride (keep rolling the dice) until they lose their dough.

Just like casino gambling, the House is the ultimate winner, especially when you don't know when to quit.

The last president for the people was JFK. He was out for for real change by abolishing the Fed. We know how that went...

On Thursday, at about 11 o'clock in the morning, the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States to a tune of $550 billion being drawn out in a matter of an hour or two.

The Treasury opened up its window to help. They pumped $105 billion into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks.

They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic and there. And that's what actually happened.

If they had not done that their estimation was that by two o'clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

Hi GreenMan!"...the entire economy of the United States, and within 24 hours the world economy would have collapsed."=====My nervous system just went into overdrive.(BARFED)I'm dumbstruck!Who can find out who made the run?Why give out the info NOW?So... the bailouts are working to somebodys advantage.

Regarding unemployment, keep in mind that there is a large number of 'hidden' unemployed, and underemployed people.

I for one have recently been retrenched (finish this Friday), however as a family we earn too much for me to qualify for any unemployment benefit. Therefore there is little point in me registering. Not until tax return time will my redundancy payment be obvious to the government.

Therefore I am one of a lot like me, who never make it into the statistics.

Therefore the U numbers could easily be adjusted up when you look at underemployed family units. However there is no easy way to get that kind of data on a monthly updated basis.

The potential for events like that is why we warn people that things can unravel very quickly once a confidence tipping point is reached. Deflation does not play out as a slow squeeze, but as an implosion (like Enron). As a positive feedback spiral it begins slowly, but picks up momentum.

This is how action by governments and central banks ends up being overtaken by events. They may be able to forestall a few smaller moves near the beginning, but as time goes by the instability increases and so does the potential for rapid collapse.

Our electronic systems for moving money around almost instantly will accentuate the potential for a global rush for the exits, and as such we'll see much larger cascading events than we've seen so far. We may well have a few more close calls first though.

Personally I suspect that this came to light now in order to pressure Congress into passing the stimulus bill.

The discrepancy in the figures for businesses going bankrupt is due, at least in the case of the UK, to different definitions.As is clear from the Telegraph link:http://www.telegraph.co.uk/finance/financetopics/recession/4539101/38000-companies-expected-to-go-bust.html38,000 refers to corporate insolvencies - sole traders and many other small businesses will not be included - the same article gives an estimate of 250,000 total businesses at risk, and 475,000 jobs - broadly comparable with the Australian figures.DaveMart

Re the FT comment from Roubini on the failure of the Anglo Saxon business model, from the same article there are links to a Q & A session with Roubini, where he answers such interesting questions as how great likely losses are in his opinion.Here is the link to the Anglo-Saxon bit:http://www.ft.com/cms/s/0/7dce3c14-f6ba-11dd-8a1f-0000779fd2ac.htmlFollow the link for the Q & ADaveMart

"Our electronic systems for moving money around almost instantly will accentuate the potential for a global rush for the exits, and as such we'll see much larger cascading events than we've seen so far. We may well have a few more close calls first though."

What does a "rush for the exits" mean in practical terms? Gold and short term treasuries in the USA, Germany, and Japan? There certainly is not enough paper, fiat currency to fill the need of Da Big Boyz. Money markets broke the buck in September.

I love it. Ilargi constantly excoriates commenters for not having facts and evidence and proof to back up their claims, but the same standard does not apply to him. He has "a feeling" that the actual facts (i.e., official unemployment figures in the U.S.) are badly wrong. No evidence, mind you, just a feeling. Oh, and disregard those numbers that show that Ireland, Australia, et al, are doing worse than the U.S. right now. Why disregard them? Does Ilargi have other facts that contradict them? No, but Ilargi doesn't need facts; all he needs is "to look at the president's urgency to get his plan approved in Congress to realize that" the hard evidence doesn't count.

As near as I can work out, if your name is Ilargi, or if you're saying that things are even worse than facts suggest and we're all totally doomed, it's perfectly acceptable to tell us what you "think" and what you "feel" with no supporting evidence whatsoever, even if the evidence contradicts you. It's only if you're not named Ilargi, or if you're suggesting that perhaps we might pull through this okay or that this might not be the end of capitalism and civilization as we know it, that you must have ironclad PROOF for everything you say. Have I got that right?

As for Ilargi's "feeling" that the "real world" (i.e., the U.S.) is doing much worse than the numbers would indicate and the media lets on, perhaps Ilargi should take a break from completely immersing himself in said media and come spend some time in the "real world" that he purports to know so much about. I live in the real world, and my take is that some people are hurting, some people have lost their jobs, and almost everybody I talk to is concerned about the economy to one degree or another, but this crisis still hasn't affected daily life for most people. Most people still have their jobs, and while they might have cut back a little bit on their spending, they still go out to eat, still buy books and music, still buy whatever their kids want/need for school/sports, etc. Consider the real numbers for car-buying in the real world; January sales were down almost 50% yoy; that means that 50% of the people who would have bought a car a year ago woke up in the morning this past month and said to themselves "this seems like a perfectly splendid time to buy a brand new car." Personally, I think those people are crazy, but hardly anyone (outside of this blog and similar venues) would agree with me; most people that I know who are themselves too worried or too broke to buy a new car right now don't think it's necessarily "crazy" for others to buy one, they just think "eh, are you sure that's a good idea?" or "eh, I wish I could afford that, maybe next year."

Ilargi is surely right about one thing, however: intellectual honesty is in awfully short supply these days.

Here is a snippet and link on executive order 11110: http://www.thetruthseeker.co.uk/article.asp?ID=7867

"On June 4, 1963, a virtually unknown Presidential decree, Executive Order 11110, was signed with the authority to basically strip the Federal Reserve Bank of its power to loan money to the United States Federal Government at interest. With the stroke of a pen, President Kennedy declared that the privately owned Federal Reserve Bank would soon be out of business. The Christian Law Fellowship has exhaustively researched this matter through the Federal Register and Library of Congress. We can now safely conclude that this Executive Order has never been repealed, amended, or superceded by any subsequent Executive Order. In simple terms, it is still valid... _________________________________We can talk of governement incompetence, stupidity, lack of foresight, oversight, and accountability all we want, but this cabal (which is above government and transcends national boundaries) runs the show. It is not dumb or incompetent. It is however, ruthless and doesn't take kindly to opposition.

These are the money changers of old. Same evil energy today as back then. They haven't gone away.

Trying to "fix" anything while they still control the money supply is like painting over rotten wood.

Ilargi posts close to an hours worth of reading material each and every day as proof.

It's a fact that home prices globally are falling.

It's a fact that stocks have lost half their value across the world.

It's a fact that millions of people have lost their jobs in the last one year.

It's a fact that the Global Banking System is insolvent, why else would BOFA, CitiGroup, RBS etc need trillions in guarantees.

It's a fact that this depression is worse than ever for unemployment, for a look at it in graphs see this - http://globaleconomicanalysis.blogspot.com/2009/02/employment-cycles-during-recessions.html

It's a fact that Toyota made it's first loss in 71 years.

It's a fact that millions of people have lost their jobs, homes and livelihoods.

It's a fact that "Advanced economies are already in a depression and the financial crisis may deepen unless the banking system is fixed, International Monetary Fund Managing Director Dominique Strauss-Kahn said."

It's a fact that 9.7 trillion has been used to support the banking system in the US alone. With trillions more in Europe, Japan, Russia etc.

It's a fact that manufacturing is being hard hit globally, exports plummeting, and layoffs are increasing in size and frequency.

It's a fact that unemployment statistics can be fudged, it's been known for a long time. Ever heard of the quote, "lies, lies and damn statistics". For more see chris martenson's crash course on fuzzy numbers.

If you think the economy is so damn good, than why don't you present the facts? Where are your facts on how resilient and strong the economy is? Why not post 100's of articles over the course of one year.

Where are your facts that Ilargi's version of events are not going to happen. We're in a crisis thats growing exponentially worse, it's only at the very end that people will get how bad this crisis really is.

By than it will be too late.

Oh and we are also in biological overshoot for an excellent 56 page pdf file on the matter to see how humans are degrading their environment and hence their carrying capacity look up the WWF Living planet report 2008.

This is what I fear,now.There is a last ,few,fairly high dollar things I want to squirrel away,along with a chunk of cash for when it starts to get really rocky...I need a couple of more months...And I don't know if we have that before things get strange.

I have this,and next years seed...but I want to put a boatload more away...I think high quality seed will be worth its weight in gold...there is a few more things...some silver coin would be nice...

Good overview. I agree. Certainly Woodrow Wilson's 'Federal Reserve' move was a disaster. And JFK, RFK, MLK were all clear examples made, for those who would truly bring 'change' and 'hope' to everyday people. Those who possess clarity on these matters must simply lead by example. Leave the 'system'. Cash out. Find a comfy, inexpensive place to reside, preferably one with a 365 day growing season (a temperate tropical location, ie: Caribbean, Panama, etc.)... and blaze the new path. Anything else is continuing to be a pawn in a losing game.Good luck to all...

Ahimsa is a Sanskrit word meaning nonviolence or avoidance of harm and violence. It is the practice of cherishing all life.

Mohandas K. Gandhi said the following about ahimsa:

"It is the only true force in life, the only permanent thing in life, the only thing that counts. Whatever effort you bestow on mastering it is well spent ... When the practice of ahimsa becomes universal, God will reign on Earth as He does in heaven."

Obama: (exerp mkt Ticker)'STOP IT NOW and start jailing the crooks or be judged as one of the felons. Your choice.' K. Denninger

Trust in American institutions, our representative form of government and of late a defrauded currency, has unraveled what few shreds of confidence remain of USA, both within and without.

This is what anarchy sounds like?This is what a shot across the bow sounds like. The circus has moved beyond the horizon. Has the tubesbeen sidelined...lost its voice?Pissing into the wind is memorable only if you're conscious.

I spent the am talking to a friend while we walked the mall hallways together. [It's a public plaza out of the elements away from car traffic noises. I don't go into the stores because of the 'music' noises.]

I noticed after about an hour that all I was talking about was doomerish stuff I've been reading here. She must have been bored silly. But every time I look at commercial America, I just see dead salesmen walking and ghosts of Christmas Shoppers Past.

"I see Herr Geithner wants to create a "public/private" partnership in order to bail out the bankers and get the economy growing again."

The equities market is tanking today because Geithner must have misplaced his Philosopher's Stone while looking for his 1040 manual. This mythical stone is said to make a turd appear like cotton candy to the suggestible. Even the teeming millions are beginning to understand that a turd by any other name smells as sweet.

"for cash deposit, check out Bank of China which has branches in NYC and LA. all the big banks of China are state owned and -- to Chinese face is more important than anything else -- they will keep up the overseas operation even if they have trouble domestically -- unless China becomes a failed state and break up."

Well, I am not looking to deposit this currency in a bank. I am trying to find a safe place to store it like a vault that would be unaffected by bank holidays.

It sounds like you basically want a reputable self-storage site. Or a really trustworthy friend/family member with a cellar. Find one of those and toss everything in an inconspicuous fireproof container.

We are sad because the process of destroying this crappy system is going to impose untold suffering on billions of people. Much of it is unnecessary. This is something that ideologues from either the left or right are unconcerned with. I watched the 1965 film of Pasternak's Dr. Zhivago the other night which really drove home that point.

I'm sad because our fate regarding the collapsing of our civilization is tragic. Die-off and intense suffering will be inevitable. All we can do is attempt to alleviate the people's suffering in the coming crises.

It is really too late to enact effective global solutions. It is too late to salvage decadent Western or global economies. It is too late to take any significant action regarding catastrophic climate change and regarding peak everything.

Ilargi, sire: although rarely do I disagree with your analyses, methods or conclusions, I've a small interjection. I do believe that the actual number of employees in the typical small business {under the US flag} is available, but I don't know where to look for it. Perhaps in the States the Small Business Administration would publish that figure. From a lifetime of being a small business person I theorize {I don't know} that it is possible that the average small business employee roll is closer to 1 than to 5, but I may be wrong. I'll write in if I find out. Meanwhile,the rest of your ponderings in the intro strike me as valid. Thank you so very much, and thanks to Ms. Stoneleigh, also.

About Barclays: I just leave that stuff untouched. Barlays has a huge UK mortgage portfolio, 36% of the total market, and real estate in Britain is sort of not doing well.

”Earnings were boosted by a tax-related gain of 2.26 billion pounds from the purchase of Lehman’s U.S. investment-bank assets.

Barclays took gains of 1.7 billion pounds on the falling market value of its own bonds, meaning it could buy back its debt for less than before. It also had gains of 326 million pounds on the sale of a life-insurance unit and 291 million pounds from the sale of stock in Mastercard and Visa, the bank said.

Total assets at Barclays Capital jumped 94 percent to 1.63 trillion pounds as derivatives rose by 737 billion pounds. The increase was driven by “significant volatility and movements in the yield curves,” together with depreciation of Britain’s pound, the company said.

“These are reflections of the same management view -- that the markets will recover sooner than expected,” said Sandy Chen, a London-based analyst at Panmure Gordon & Co. who has a sell rating on the shares. “We are concerned about the derivatives- led expansion of Barclays’s balance sheet.”

Barclays took 5.6 billion pounds of writedowns for residential mortgages in 2008, including 1.9 billion pounds for Alt A and 1.7 billion pounds in for U.S. subprime losses. It also wrote down almost 1.5 billion pounds on commercial real estate and mortgages, and 980 million pounds on other credit assets.

Barclays also elimintaed dividends and plans 4500 lay-offs.

I think it's obvious that number bubbling is the game at Barclays. Their Lehman purchases, in particular, look suspect.